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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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or
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the
transition period from ___ to ___
EMCORE
Corporation
(Exact
name of registrant as specified in its charter)
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New
Jersey
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22-2746503
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(State
or other jurisdiction of incorporation or
organization)
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(I.R.S.
Employer Identification No.)
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10420
Research Road, SE, Albuquerque, New Mexico
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87123
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number,
including area code: (505)
332-5000
Former
address, if changed since last report: 145
Belmont Drive, Somerset,
NJ 08873
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class:
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Common
Stock, No Par Value
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Name
of each exchange on which registered:
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NASDAQ
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Securities
registered pursuant to Section 12(g) of the Act:
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None
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. ¨Yes xNo
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. ¨Yes xNo
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. ¨Yes xNo
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
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o
Large accelerated
filer
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x Accelerated
filer
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o
Non-accelerated filer
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).¨Yes xNo
The
aggregate market value of common stock held by non-affiliates of the registrant
as of March 30, 2007 (the last business day of the registrant's most recently
completed second fiscal quarter) was approximately $203.8 million, based on
the
closing sale price of $5.00 per share of common stock as reported on the NASDAQ
Global Market.
FORM
10-K
TABLE
OF CONTENTS
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PAGE
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3
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Part
I
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Item
1.
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10
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Item
1A.
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23
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Item
1B.
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38
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Item
2.
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39
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Item
3.
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39
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Item
4.
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42
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Part
II
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Item
5.
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43
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Item
6.
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43
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Item
7.
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49
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Item
7A.
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76
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Item
8.
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77
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77
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78
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80
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82
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129
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Item
9.
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130
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Item
9A.
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130
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Item
9B.
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134
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Part
III
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Item
10.
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134
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Item
11.
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136
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Item
12.
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144
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Item
13.
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145
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Item
14.
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146
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Part
IV
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Item
15.
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148
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150
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In
this
Annual Report on Form 10-K, EMCORE Corporation (the “Company”, “we”, or
“EMCORE”) restated its Consolidated Balance Sheet as of September 30, 2005, the
Consolidated Statements of Operations, Shareholders’ Equity and Cash Flows for
the fiscal years ended September 30, 2005 and 2004, and the related notes
thereto as previously filed with the Securities and Exchange Commission (the
“SEC”). This Annual Report also reflects the restatement of the
related quarterly financial data for the fiscal years ended September 30, 2006
and 2005 and selected financial data as of and for the fiscal years ended
September 30, 2004, 2003, and 2002 as disclosed in Item 6 – Selected
Financial Data and Item 7 - Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
Background
In
May
2006, EMCORE’s senior management voluntarily began an inquiry into the Company’s
historical stock option granting practices. The inquiry was not in
response to any governmental investigation, shareholder lawsuit, whistleblower
complaint, or inquiries from media organizations. Based on an initial
review, senior management approached the Board of Directors and requested that
it form a Special Committee to examine EMCORE’s historical stock option granting
practices. The Board of Directors, pursuant to senior management’s
recommendation, appointed a Special Committee of three independent EMCORE
directors to investigate the Company’s historical stock option granting
practices.
Based
on
this independent investigation, senior management, in consultation with the
Audit Committee of the Board of Directors, concluded that it was likely that
the
appropriate measurement dates for certain stock option grants, under the
appropriate accounting treatment for stock options, differed from the recorded
grant dates for such awards. Accordingly, on November 6, 2006, as
initially disclosed in a Current Report on Form 8-K, senior management and
the
Audit Committee determined that the Company’s financial statements included in
its annual and interim reports and any related reports of its independent
registered public accounting firm, earnings press releases, and similar
communications previously issued by the Company for the periods beginning with
fiscal year 2000 should no longer be relied upon.
This
Annual Report on Form 10-K for the year ended September 30, 2006, reflects
a
restatement for additional stock-based compensation expense, under the
appropriate accounting treatment for stock options for all periods
presented. We have not amended and we do not intend to amend any of
our other previously filed annual reports on Form 10-K or quarterly reports
on
Form 10-Q in connection with this matter.
Scope
of Stock Option Grant Review
The
Special Committee, together with independent counsel and outside accounting
experts, reviewed stock option grants from the time of EMCORE’s initial public
offering in March 1997 through September 30, 2006. The Special Committee’s
advisors also reviewed more than 250,000 e-mail messages, Board and Compensation
Committee minutes, and other documents, files, and data. Additionally, these
advisors interviewed present and former officers and employees of the Company
who were involved in the stock option granting process.
Special
Committee Findings
As
originally disclosed in a Current Report on Form 8-K dated November 15, 2006,
the Special Committee’s investigation and report included the following key
findings and conclusions:
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·
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The
investigation was initiated as a result of senior management’s
recommendation to the Board in a manner consistent with senior
management’s past conduct in instances where it has learned of issues
concerning accounting, legal, or regulatory
compliance.
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·
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The
Company, through its senior management, cooperated fully with the
investigation, providing all requested documents and making senior
management and the Company’s current and former employees available for
interviews, all in a conscientious and timely
fashion.
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·
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There
was no evidence that senior management in any way tampered with or
fabricated documents or took other actions consistent with intent
to
defraud.
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·
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Senior
management did not receive any option grants between October 3, 2001
and
May 18, 2004, a period that marked the absolute historic low point
of the
Company’s common stock market value. During this period,
EMCORE stock routinely traded at or below $2 per share and reached
a low
point of $1 per share. In addition, EMCORE implemented a stock option
exchange plan, accounted for under the provisions of FAS
Interpretation No. (“FIN”) 44, Accounting for Certain transactions
involving Stock Compensation, whereby the Company offered to exchange
all options with a strike price greater than $4. Senior management
voluntarily elected not to participate in the repricing and retained
their
underwater options, while the options belonging to those participating
in
the exchange plan were repriced to
$1.82.
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·
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Senior
management exercised only a small portion of the stock options granted
since the Company’s Initial Public
Offering.
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·
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Prior
to the completion of the Special Committee’s review, Mr. Richards, Chief
Executive Officer, Mr. Werthan, former Chief Financial Officer, and
Mr.
Brodie, former Chief Legal Officer, informed the Company that they
did not
wish to retain any benefits from erroneously priced stock
options. The Chief Executive Officer and the former Chief Legal
Officer voluntarily tendered payments of $166,625 and $97,000,
respectively, representing the entire benefit received from the misdated
stock options exercised and sold by them. The former Chief
Financial Officer had not exercised or sold any of the misdated stock
options. The former Chief Financial Officer and the former
Chief Legal Officer further voluntarily surrendered all rights to
any
unexercised grants that had been identified as
misdated.
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·
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The
investigation found no evidence that the Board generally did not
properly
exercise oversight duties with respect to the Company’s stock option
plans.
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·
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The
Special Committee stated that it was unable to conclude that the
Company
or anyone involved in the stock option granting process at the Company
engaged in willful misconduct. Rather, the granting process was often
characterized by carelessness and inattention to applicable accounting
and
disclosure rules, and the Company failed to maintain adequate controls
concerning the issuance of stock
options.
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·
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The
Special Committee found that there were occasions when administrative
changes were made to the grant lists after the grant date and exercise
price were set.
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·
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Senior
management did not seek to profit from the issuance of the stock
option
grants at the expense of the Company or its
shareholders.
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·
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The
Special Committee found, with respect to retention grants awarded
in 2000
and 2004, that even after lists had been announced as “final” and a grant
date set, later adjustments to the lists sometimes included changes
both
in the number of options granted to individuals and in the aggregate
number of options granted. No changes to the retention
grant lists benefited any member of senior
management.
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·
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The
Special Committee further concluded that, as a result of, among other
things, such inadequate controls and practices, there were certain
instances where the exercise prices of certain stock option grants,
principally related to new hire grants, appear to have been selected
with
the benefit of hindsight -- i.e., selected to reflect the stock
price at a date, prior to the actual date of grant, when the Company’s
stock price was lower.
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The
Special Committee ultimately concluded that no member of EMCORE’s management
involved in the granting of, or accounting for, the Company’s stock option
awards willfully misdated options with the intent to circumvent the Company’s
accounting policies, controls and disclosure requirements. Moreover, the Special
Committee found that prior to May 2006 no member of the Company’s management
involved in the granting of, or accounting for, stock options had sufficient
knowledge of Accounting Principles Board Opinion No. 25, “Accounting for
Stock Issued to Employees” (“APB 25”) at the time to understand the accounting
consequences arising out of the Company’s stock option granting
practices.
The
Special Committee also recommended that the Company adopt certain policies,
procedures and practices to govern the Company’s option granting practices in
the future. On November 13, 2006, the Company revised its stock
option granting policy to implement the recommendations of the Special Committee
and imposed a higher degree of control over the Company’s option granting
process.
Stock
Option Plans
EMCORE
maintains two
incentive stock option plans: the 1995 Incentive and Non-Statutory Stock Option
Plan (the “1995 Plan”) and the 2000 Stock Option Plan (the “2000 Plan” and
together with the 1995 Plan, the “Option Plans”). Most of the
Company’s stock options vest and become exercisable over four to five years and
have ten-year terms. Certain stock options under the Option Plans are
intended to qualify as incentive stock options pursuant to Section 422A of
the
Internal Revenue Code. Both the 1995 Plan and the 2000 Plan
provided that no incentive stock option may be issued at less than 100% of
fair
market value at the time that the option is granted. The 2000 Plan
also stated that the Compensation Committee of the Board or the Board itself
was
empowered to delegate all or any part of its responsibilities and powers to
any
person or persons selected by it, including, among other powers:
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·
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selecting
to whom options shall be granted;
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·
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determining
the number of shares of stock; and,
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·
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setting
the stock option exercise price.
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Prior
to
October 1, 2005, the Company accounted for share-based compensation expense
for
options granted under the Option Plans using the recognition and measurement
provisions of APB 25. APB 25 defined the measurement date as the
first date on which both the number of shares an individual employee was
entitled to receive and the option or purchase price, if any, were
known. On October 1, 2005, the Company adopted Statement of Financial
Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment (revised
2004) which requires all share-based payments to employees to be recognized
in the Statement of Operations based on their fair values.
Delegation
of Authority
Since
1997, the authority to issue stock option grants to non-executive new hires
has
resided with senior management. The Board of Directors formally gave
this authority to them in that year. For all other stock option
grants to non-executives, such as retention and
promotion grants, the authority to make grants varied as follows:
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·
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For
stock option grants issued under the 1995 Plan, which was in effect
from
1997 through 1999, approval was required by either the Board of
Directors
or the Compensation Committee in order to establish a measurement
date
under APB 25.
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·
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For
stock option grants issued from the date of adoption of the 2000
Plan on
November 8, 1999 through September 30, 2005, the Board had implicitly
delegated the authority to the Chief Executive Officer to determine
the
recipients and terms of awards and grant
them.
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·
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For
stock option grants issued on or after October 1, 2005, the Board
formally
delegated the authority to the Chief Executive Officer to determine
the
recipients and terms of awards and grant
them.
|
All
grants were subsequently ratified by the Board as approved by the Chief
Executive Officer.
Summary
of Restatement Adjustments
The
Company, with consideration given to the results of the Special Committee’s
independent investigation, reviewed approximately 5,640 individual grants,
representing more than 19 million stock options, from the period when the
Company became public in March 1997 through September 30,
2006. The principal component of the restatement was a revision
to measurement dates of certain stock option grants. Based upon their
review, the Company found, among other things, the following:
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o
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The
cumulative effect of misdated options totaled approximately $24.5
million.
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o
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A
majority of the restatement related to periods prior to fiscal year
2004. The restatement impact on the Statement of Operations in
fiscal years 2006 and 2005 totaled approximately $0.7 million and
$0.4
million, respectively.
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|
o
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Two
misdated retention grants, dated prior to fiscal year 2003, represented
approximately $20.2 million, or 82% of the total stock option
restatement. These stock option grants were issued during a
period with high stock price
volatility.
|
Consistent
with the direction provided to the public by the Office of the Chief Accountant
of the SEC in a letter dated September 19, 2006 (the “OCA Letter”), the Company
reviewed all available relevant information, including historical approval
patterns where evidence was available, and formed what the Company believes
is a
reasonable conclusion as to the most likely option granting actions that
occurred and the dates which such actions occurred in determining the
appropriate accounting.
There
was
no stock-based compensation expense for options as previously reported under
APB 25 for fiscal years 1997 through 2005. The following table
presents the effects of the revision of measurement dates on stock-based
compensation expense for options included in the determination of net income
(loss), for fiscal year 1997 through the third quarter of fiscal year 2006,
in
accordance with the provisions of APB 25 and SFAS 123(R).
|
(in
thousands)
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|
Year
|
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Net
Additional Stock-Based Compensation Expense
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Fiscal
1997
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$ |
58
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|
Fiscal
1998
|
|
|
2
|
|
|
Fiscal
1999
|
|
|
568
|
|
|
Fiscal
2000
|
|
|
11,012
|
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|
Fiscal
2001
|
|
|
611
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Fiscal
2002
|
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|
5,638
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Fiscal
2003
|
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|
5,013
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Total
Fiscal 1997-2003
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22,902
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Total
Fiscal 2004
|
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|
528
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|
|
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First
Quarter 2005
|
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|
136
|
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Second
Quarter 2005
|
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|
44
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Third
Quarter 2005
|
|
|
45
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Fourth
Quarter 2005
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153
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Total
Fiscal 2005
|
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|
378
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|
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|
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First
Quarter 2006
|
|
|
332
|
|
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Second
Quarter 2006
|
|
|
73
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Third
Quarter 2006
|
|
|
294
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Fourth
Quarter 2006
|
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|
-
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Total
Fiscal 2006
|
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|
699
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|
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Total
Impact
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|
$ |
24,507
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Review
of Option Grants
The
Company’s stock option grants were organized into categories based on grant
type. The Company analyzed the evidence related to each category of grants
including, but not limited to, electronic and physical documents. Based on
the
relevant facts and circumstances, the Company applied the applicable accounting
standards to determine, for every grant within each category, the most
appropriate measurement date. The principal grant categories were as
follows:
EMCORE
has a practice of granting stock options to employees for the purpose of
retaining and motivating key employees. Generally, the process for retention
grants involved the Board of Directors approving a pool of options to be
distributed to key employees. The Board of Directors then delegated to senior
management the authority to determine the terms and recipients and issue
the
awards under the Option Plans to non-executive
employees. Senior management, after receiving information from
the Board as to the pool of awards available, would then, in conjunction
with
others in the Company, compile the grant distribution list, select the exercise
price and issue the awards. The option grants were priced reflecting the
closing
price of EMCORE common stock on the previously stated grant date, which may
not
have been the date the terms were finalized. If executive management were
to
receive a grant as part of the overall retention grant, the Board of Directors
or the Compensation Committee would approve the amount and allocation to
these
individuals in advance and would provide that such grants were to be priced
at
the same time the stock options for the key employees were
completed. The Board of Directors adopted stock option distribution
guidelines in 2005 to be followed by senior management in their allocation
process to non-executive employees. The purpose of these guidelines was to
govern the distribution of stock option grants to employees at different
grade
levels to ensure consistency and reduce disparities across
divisions.
In
the
course of its review, management reviewed all retention grants issued by
the
Company, which represented approximately nine million stock options. Measurement
dates were selected based upon evidence of the most appropriate date that
a
final listing of employees and grant terms, including exercise price, had
been
determined and approved by management with the appropriate level of authority.
In those instances where the market price of the Company’s stock on the most
appropriate measurement date was higher than the option exercise price, the
Company recognized stock-based compensation expense. The Company recorded
no
financial statement benefit for option grants issued above the fair market
value
on the revised measurement dates, as such benefit would not be permitted
under
generally accepted accounting principles. We noted instances, where subsequent
to the revised measurement date being established, the number of options
granted
to certain employees changed. In these instances, we treated such revisions
as a
modification and applied variable plan accounting to those awards subsequent
to
modification under the provisions of APB 25 and related interpretations.
No
changes were made to grants to senior management subsequent to the revised
measurement date. The total adjustment related to retention grants totaled
approximately $22.0 million, or approximately 90% of the total
adjustment.
EMCORE
has a practice of granting stock options to eligible new employees on their
start date. The Board of Directors had delegated to senior management the
authority to make new hire grants under the Option Plans to non-executive
employees. The number of stock options awarded was generally based on stock
option distribution guidelines approved by the Board of Directors. The number
of
stock options granted were included in the employee's offer letter and the
grant
date and exercise price were determined on the employee's first day of
employment and the closing price of the Company's common stock on that
day.
Management
reviewed
each new hire grant that the Company made since EMCORE became a public
company. During this review, management determined that, absent evidence
that senior management or the Board of Directors granted options after an
employee’s hire date or the terms were not finalized as of the hire date, the
hire date was determined to be the most appropriate measurement date for
new
hire grants. In instances where the market price of the Company’ stock on the
most appropriate measurement date was higher than the option exercise price,
the
Company recognized stock-based compensation expense. The Company recorded
no
financial statement benefit for option grants issued above the fair market
value
on the revised measurement dates, as such benefit would not be permitted
under
generally accepted accounting principles. All new hire grants with incorrect
measurement dates were granted prior to October 1, 2005. The total adjustment
related to new hire grants totaled approximately $1.9 million, or approximately
8% of the total adjustment.
Management
reviewed other stock option grants, which included promotion, non-qualified,
and
acquisition related option grants, as well as, stock awards granted as part
of
the Company’s Employee Stock Purchase Plan. Measurement dates were selected
based upon evidence that a final listing of employees and grant terms, including
exercise price, had been determined and approved by management with the
appropriate level of authority. Evidence of a most appropriate measurement
date
was based upon Company e-mails or other correspondence that provided evidence
that the terms of the awards had been finalized and approved. In those instances
where the market price of the Company’s stock on the most appropriate
measurement date was higher than the option exercise price, the Company
recognized stock-based compensation expense. The Company recorded no financial
statement benefit for option grants issued above the fair market value on
the
revised measurement dates, as such benefit would not be permitted under
generally accepted accounting principles. The total adjustment related to
other
equity awards totaled approximately $0.6 million, or approximately
2%.
Sensitivity
Analysis
Based
on
the available facts and circumstances surrounding our stock option granting
practices, we adopted a methodology for determining the most likely measurement
dates. We believe the application of this methodology, based on all relevant
information available, indicated the most likely date when the number of
options
granted to each employee was approved and the exercise price and the numbers
of
shares were known with finality. However, we acknowledge that measurement
date
conclusions are dependent on the facts and circumstances of each stock option
grant and that some grants involved the application of significant judgment.
Because certain measurement dates could not be determined with certainty
and
involved subjectivity, we performed a sensitivity analysis to determine the
impact of using alternative measurement dates for certain grants.
In
our
sensitivity analysis, we looked at a range of possible alternative measurement
dates. This range, depending on the facts and circumstances of the specific
grant, began with either (i) the original grant date, or (ii) the date on
which
grant lists were completed and presented for approval; and ended with either
(i)
the date on which a completed list was presented to the Equity Edge
administrator or was communicated to the recipients, or (ii) the date it
was
entered into Equity Edge, our stock option administration software. Within
this
range of dates, we computed compensation expense for each grant using the
low,
average, and high stock market prices of the Company’s common stock during the
period and compared the resulting amount to the compensation recorded using
the
most likely date. The use of the low stock market price would have resulted
in a
$2.6 million decrease in stock-based compensation expense. The use of the
average and high stock market prices would have resulted in an increase of
$6.6
million and $14.5 million, respectively, in stock-based compensation
expense.
We
believe our methodology, based on the best evidence available, results in
the
most likely measurement date for our stock option grants.
Tax
Impact
The
Company reviewed the implications of Section 162(m) of the Internal Revenue
Code
which prohibits tax deductions for non-performance based compensation paid
to
the chief executive officer and the four highest compensated officers in excess
of one million dollars in a taxable year and concluded that no adjustments
to
our previously filed financials statements are required.
Remediation
Activities
|
|
·
|
Non-administrative
grant responsibilities other than with respect to new-hire options
are to
be set by the Compensation
Committee.
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·
|
All
new-hire options be issued the later of an employee’s first day of
employment, or where applicable, the date the Compensation Committee
approved the terms of the new-hire grant and have an exercise price
of not
less than 100% of the fair market value of the Company’s stock on that
date. The Board will conduct a review of all new-hire grants to
ensure compliance with the Company’s policies and
procedures.
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·
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The
grant date for all options awarded to employees other than new-hire
options is the date on which the Compensation Committee meets and
approves
the grants.
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·
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The
exercise price of options other than new hire-options should be set
at the
closing price of the common stock of the Company on the date on which
the
Compensation Committee approves the
grants.
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·
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The
Company should, with respect to annual retention grants to employees,
maintain the practice of awarding retention grants to senior management
on
the same date and with the same exercise price as retention grants
awarded
to non-senior management employees.
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·
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No
additions or modifications to option grants should be permitted after
the
Compensation Committee has approved the option
grants.
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·
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All
grants are to be communicated to employees as soon as reasonably
practicable after the grant date.
|
Under
the
terms of option agreements issued under the 2000 Plan, terminated employees
who
have vested and exercisable stock options have 90 days after the date of
termination to exercise the options. In November 2006, the Company announced
suspension of reliance on previously issued financial statements which in turn
caused the Form S-8 registration statements for shares of common stock issuable
under the option plans not to be available. Therefore, terminated employees
were
precluded from exercising their options during the remaining contractual
term. This November 2006 modification did not have any accounting
impact as there was no incremental compensation in accordance with SFAS
123(R).
To
address this issue with affected former employees under the 2000 Plan, EMCORE’s
Board of Directors agreed in April 2007 to approve an option grant
“modification” for these individuals by extending the normal 90-day exercise
period after termination date to a date after which EMCORE becomes compliant
with its SEC filings and the registration of the option shares is once again
effective. The Company is preparing a plan of communication with its
terminated employees relating to the tolling arrangement which is expected
to be
finalized as soon as reasonably practicable. We will account for the
April 2007 modification of stock options as additional compensation expense
in
accordance with SFAS 123(R).
Additional
Information
See
Item 1A – Risk Factors, for a discussion of certain risk factors related to
our historical stock option grant review.
See
Item
7 - Management’s Discussion and Analysis of Financial Condition and Results of
Operations, for a discussion of our critical accounting policy regarding
stock-based compensation.
See
Item
8 – Financial Statements and Supplementary Data, specifically Note 20,
Restatement of Consolidated Financial Statements, of the Notes to Consolidated
Financial Statements, for the financial impact of the revised measurement dates
on stock-based compensation expense, on a year-by-year basis.
See
Item 9A – Controls and Procedures, which describes management’s conclusion,
in light of the findings of the Special Committee and the restatement reflected
in this Annual Report on Form 10-K, that the Company had two material weaknesses
in internal control over financial reporting related to (i) stock option plan
administration and accounting for and disclosure of stock option grants as
of
September 30, 2006 and (ii) the process for the identification and
implementation of the proper accounting for certain
transactions. Such material weaknesses resulted in material errors
and the restatement of previously issued financial statements. As a
result, management has concluded that the Company’s internal control over
financial reporting and its disclosure controls and procedures were not
effective as of September 30, 2006.
PART
I
Company
Overview
EMCORE
is
a leading provider of compound semiconductor-based components and subsystems
for
the broadband, fiber optic, satellite and terrestrial solar power
markets. We have two operating segments: Fiber Optics and
Photovoltaics. EMCORE's Fiber Optics segment offers optical
components, subsystems and systems that enable the transmission of video, voice
and data over high-capacity fiber optic cables for high-speed data and
telecommunications, cable television (CATV) and fiber-to-the-premises (FTTP)
networks. EMCORE's Photovoltaics segment provides solar products for
satellite and terrestrial applications. For satellite applications, EMCORE
offers high-efficiency compound semiconductor-based gallium arsenide (GaAs)
solar cells, covered interconnect cells (CICs) and fully integrated solar
panels. For terrestrial applications, EMCORE offers its
high-efficiency GaAs solar cells for use in solar power concentrator
systems. For specific information about our company, our products or
the markets we serve, please visit our website at
http://www.emcore.com. We were established in 1984 as a New Jersey
corporation.
EMCORE
is
subject to the information requirements of the Securities Exchange Act of 1934.
We file periodic reports, current reports, proxy statements and other
information with the SEC. The SEC maintains a website
(http://www.sec.gov) that contains all of our information that has been filed
electronically. Certain SEC filings are available on our website, free of
charge, as soon as reasonably practicable after such material is electronically
filed with, or furnished to, the SEC. The information on EMCORE’s
website is not incorporated by reference into and is not made a part of this
Annual Report on Form 10-K or a part of any other report or filing with the
SEC.
As
discussed in the Explanatory Note, this Annual Report on Form 10-K includes
restatements of the following previously filed financial statements, data and
related disclosures:
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·
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Consolidated
Statements of Operations, Shareholders’ Equity and Cash Flows for the
fiscal years ended September 30, 2005 and
2004;
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·
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Unaudited
quarterly consolidated selected financial data for all quarters in
our
fiscal year ended September 30, 2005 and the first three quarters
in our
fiscal year ended September 30,
2006.
|
We
have
not amended, and we do not intend to amend, any of our other previously filed
annual reports on Form 10-K or quarterly reports on Form
10-Q. This Annual Report on Form 10-K for the year ended
September 30, 2006 reflects a restatement for additional stock-based
compensation expense, under the appropriate accounting treatment for stock
options, for all periods presented.
Industry
Overview
Compound
semiconductor-based products provide the foundation of components, subsystems
and systems used in a broad range of technology markets, including broadband,
datacom, telecom and satellite communication equipment and networks, advanced
computing technologies and satellite and terrestrial solar power generation
systems. Compound semiconductor materials are capable of providing
electrical or electro-optical functions, such as emitting optical communications
signals, detecting optical communications signals, and converting sunlight
into
electricity.
Our
Markets
Collectively,
our products serve the telecommunications, cable television, defense and
homeland security, and satellite and terrestrial solar power
markets. The following illustration shows how our products are
deployed throughout the world’s communication infrastructure and power
generation markets.
Fiber
Optics
Our
products enable information that is encoded on light signals to be transmitted,
routed (switched) and received in communication systems and
networks. Our Fiber Optics segment primarily targets the following
markets:
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·
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Cable
Television (CATV) Networks. We are a market leader in
providing radio frequency (RF) over fiber products for the CATV
industry. Our products are used in hybrid fiber coaxial (HFC)
networks that enable cable service operators to offer multiple advanced
services to meet the expanding demand for high-speed Internet, on-demand
and interactive video and other advanced services, such as high-definition
television (HDTV) and voice over IP (VoIP). Our CATV products
include forward and return-path analog and digital lasers, photodetectors
and subassembly components, broadcast analog and digital fiber-optic
transmitters and quadrature amplitude modulation (QAM) transmitters
and
receivers. Our products provide our customers with increased
capacity to offer more cable services; increased data transmission
distance, speed and bandwidth; lower noise video receive; and lower
power
consumption.
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·
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Fiber-To-The-Premises
(FTTP) Networks. Telecommunications companies are
increasingly extending their optical infrastructure to the customer’s
location in order to deliver higher bandwidth services. We have developed
and maintained customer qualified FTTP components and subsystem products
to support plans by telephone companies to offer voice, video and
data
services through the deployment of new fiber-based access
networks. Our FTTP products include passive optical network
(PON) transceivers, analog fiber optic transmitters for video overlay
and
high-power erbium-doped fiber amplifiers (EDFA), analog and digital
lasers, photodetectors and subassembly components, analog video receivers
and multi-dwelling unit (MDU) video receivers. Our products
provide our customers with higher performance for analog and digital
characteristics; integrated infrastructure to support competitive
costs;
and additional support for multiple
standards.
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·
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Data
Communications Networks. We provide leading-edge optical
components and transceiver modules for data applications that enable
switch-to-switch, router-to-router and server-to-server backbone
connections at aggregate speeds of 10 gigabits per second (G) and
above. Our products support 10G Ethernet, optical Infiniband
and parallel optical interconnects for enterprise Ethernet, metro
Ethernet
and high performance computing (HPC) applications. Our data communications
products include components and transceivers for LX4, EX4, SR, LR,
LRM and
CX4 10G Ethernet applications and optical Infiniband, high-speed
lasers,
photodetectors and subassembly components, parallel optical modules
and
optical media converters. Our products provide our customers
with increased network capacity; increased data transmission distance
and
speeds; increased bandwidth; lower power consumption; improved cable
management over copper interconnects; and lower cost optical
interconnections for massively parallel
multi-processors.
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·
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Telecommunications
Networks. Our leading-edge optical components and modules enable
high-speed (up to an aggregate 40G) optical interconnections that
drive
advanced architectures in next-generation carrier class switching
and
routing networks. Our products are used in equipment in the network
core
and key metro optical nodes of voice telephony and Internet
infrastructures. Our products include a comprehensive parallel
optical transceiver family, distributed feedback lasers (DFB) and
APD
components in various packages for OC-48 and OC-192
applications. Recently, we developed and launched a XFP DWDM
(wavelength division multiplexing) transceiver and 300-pin
small-form-factor tunable transponder products for the telecommunications
market.
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·
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Satellite
Communications (Satcom) Networks. We are a leading provider of
optical components and systems for use in equipment that provides
high-performance optical data links for the terrestrial portion of
satellite communications networks. Our products include transmitters,
receivers, subsystems and systems that transport wideband radio frequency
and microwave signals between satellite hub equipment and antenna
dishes. Our products provide our customers with increased
bandwidth and lower power
consumption.
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·
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Storage
Area Networks. Our high performance optical components are also
used in high-end data storage solutions to improve the performance
of the
storage infrastructure. Products include high-speed 850nm
vertical cavity surface emitting lasers (VCSELs), DFBs, photodiode
components for 2G, 8G and 10G Fibre Channel. Our products also
include 10G (single data rate Infiniband SDR IB) and 20G (double
data rate
Infiniband DDR IB) transmit and receive optical media
converters.
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Video
Transport. Our video transport product line offers
solutions for broadcasting, transportation, IP television (IPTV),
mobile
video and security & surveillance applications over private and public
networks. EMCORE’s video, audio, data and RF transmission systems serve
both analog and digital requirements, providing cost-effective, flexible
solutions geared for network reconstruction and
expansion.
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Defense
and Homeland Security. Leveraging our expertise in RF
module design and high-speed parallel optics, we provide a suite
of
ruggedized products that meet the reliability and durability requirements
of the U.S. Government and defense markets. Our specialty
defense products include fiber optic gyro components used in precision
guided munitions, ruggedized parallel optic transmitters and receivers,
high-frequency RF fiber optic link components for towed decoy systems,
optical delay lines for radar systems, EDFAs, terahertz spectroscopy
systems and other products. Our products provide our customers
with high frequency and dynamic range; compact form-factor; and extreme
temperature, shock and vibration
tolerance.
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Consumer
Products. We intend to extend our optical technology
into the consumer market by integrating our VCSELs into optical computer
mice and ultra short data links. We are in production with
customers on several products and currently qualifying our products
with
additional customers. An optical computer mouse with laser
illumination is superior to LED-based illumination in that it reveals
surface structures that a LED light source cannot uncover. VCSELs
enable
computer mice to track with greater accuracy, on more surfaces and
with
greater responsiveness than existing LED-based
solutions.
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The
following charts depict some of our fiber optics products:
As
summarized in the table below, we have positioned ourselves as a vertically
integrated fiber optics component and subsystem manufacturer that services
a
significant portion of the digital analog communications market:
| |
Datacom
and Telecom
|
Broadband
|
| |
Serial
1-4G
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Serial
10G
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Parallel
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CATV
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FTTP
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850nm
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1310-1550nm
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850nm
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1310-1550nm
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Copper
|
850nm
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1310-1550nm
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1310,1490,1550nm
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MODULES
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SR
X2
SR
SFP+
|
LX4
Xenpak LX4 X2
LR
X2
LR
SFP+
ZR
XFP DWDM
Tunable
SFF
300-pin
Tspdr
LRM
SFP+
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CX4
Xenpak
CX4
X2
CX4
XFP
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SNAP12
SmartLink
Mini95
QSFP
|
Ex-Mod/Dir-Mod
/Lin-Mod
1550,
QAM
and 1310
Transmitters
Receiver
Subsystem
Tx
Engine
Rx
Video Card
|
B-PON
TxRx
B-PON
MDU TxRx
G-PON
TxRx
GPON
MDU TxRx
|
|
OSAS
|
TO
- Cans
LC/SC
TOSA
LC/SC
ROSA
|
TO
- Cans
LC/SC
TOSA
LC/SC
ROSA
|
LC/SC
TOSA
LC/SC
ROSA
|
DML
Butterfly
Mini
Dil Rx
LC/SC
ROSA
LRM
TOSA
Linear
ROSA
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AOSA
|
DFB
Butterfly Analog PD OSA
|
DFB
Laser TO
APD-TIA
TO
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CHIPS
|
VCSELs
PDs
|
FP, DFBs
PINs, APDs
|
VCSELs
PDs
|
FP, DFBs
PINs, APDs
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|
VCSEL
Array
PIN
Array
|
Analog
DFB
Analog
PD
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DFB
Laser
APDs
|
Photovoltaics
We
believe our high-efficiency compound semiconductor-based GaAs solar cell
products provide our customers with compelling cost and performance advantages
over traditional silicon-based solutions. These include higher solar
cell efficiency, allowing for greater conversion of light into electricity,
an
increased ability to benefit from use in solar concentrator systems, ability
to
withstand high heat and radiation environments and reduced overall
footprint. Our Photovoltaics segment serves two primary
markets:
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·
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Satellite
Solar Power Generation. We are a leader in providing
solar power generation solutions to the global communications satellite
industry and U.S. Government space programs. We provide
advanced compound semiconductor solar cell and solar panel products,
which
are more resistant to radiation levels in space and generate substantially
more power from sunlight than silicon-based solutions. Space
power systems using our multi-junction solar cells weigh less per
unit of
power than traditional silicon-based solar cells. These performance
characteristics increase satellite useful life, increase satellites’
transmission capacity and reduce launch costs. Our products
provide our customers with higher light to power conversion efficiency
for
reduced size and launch costs; higher radiation tolerance; and longer
lifetime in harsh space environments. We design and manufacture
multi-junction compound semiconductor solar cells for both commercial
and
military satellite applications. We currently manufacture and sell
one of
the most efficient and reliable, radiation resistant advanced
triple-junction solar cells in the world, with an average "beginning
of
life" efficiency of 28.5%. In May 2007, EMCORE announced that
it has attained solar conversion efficiency of 31% for an entirely
new
class of advanced multi-junction solar cells optimized for space
applications. EMCORE is also the only manufacturer to supply
true monolithic bypass diodes, for shadow protection, utilizing several
EMCORE patented methods. A satellite’s operational success and
corresponding revenue depend on its available power and its capacity
to
transmit data. EMCORE also provides covered interconnect cells (CICs)
and
solar panel lay-down services, giving us the capacity to manufacture
complete solar panels. We can provide satellite manufacturers with
proven
integrated satellite power solutions that considerably improve satellite
economics. Satellite manufacturers and solar array integrators rely
on
EMCORE to meet their satellite power needs with our proven flight
heritage. The pictures below represent a solar cell and solar panel
for
satellite space power applications.
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·
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Terrestrial
Solar Power Generation. Solar power generation systems
use photovoltaic cells to convert sunlight to electricity and have
been
used in space programs and, to a lesser extent, in terrestrial
applications for several decades. The market for terrestrial
solar power generation solutions has grown significantly as solar
power
generation technologies improve in efficiency, as global prices for
non-renewable energy sources (e.g., fossil fuels) continue to rise,
and as
concern has increased regarding the effect of carbon emissions on
global
warming. Terrestrial solar power generation has emerged as one of
the most
rapidly growing renewable energy sources due to certain advantages
solar
power holds over other energy sources, including reduced environmental
impact, elimination of fuel price risk, installation flexibility,
scalability, distributed power generation (i.e., electric power is
generated at the point of use rather than transmitted from a central
station to the user), and reliability. The rapid increase in demand
for
solar power has created a growing need for highly efficient, reliable
and
cost-effective solar power concentrator
systems.
|
EMCORE
has adapted its high-efficiency compound semiconductor-based GaAs solar cell
products for terrestrial applications, which are intended for use with solar
concentrator systems in utility-scale installations. In August 2007,
EMCORE announced that it has reached 39% peak conversion efficiency on its
terrestrial concentrating solar cell products currently in volume
production. This compares favorably to typical efficiency of 15-21%
on silicon-based solar cells. We believe that solar concentrator systems
assembled using our compound semiconductor solar cells will be competitive
with
silicon-based solar power generation systems because they are more efficient
and, when combined with the advantages of concentration, we believe will result
in a lower cost of power generated. Our multi-junction solar cell
technology is not subject to silicon shortages, which has led to increasing
prices in the raw materials required for silicon-based solar
cells. While the terrestrial power generation market is still
developing, we have already fulfilled production orders for one solar
concentrator company, and provided samples to several others, including major
system manufacturers in Europe and Asia. EMCORE currently serves the
terrestrial solar market with two levels of concentrated photovoltaic (CPV)
products: components (including solar cells and solar cell receivers) and CPV
power systems, as shown in the pictures below:
|
Terrestrial
solar cell (mm)
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Terrestrial
solar cell receiver
|
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CPV
power system
|
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Recent
investments and strategic partnerships include:
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·
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In
November 2006, EMCORE invested $13.5 million in WorldWater & Solar
Technologies Corporation (WorldWater, OTC BB:WWAT.OB) a leader in
solar
electric engineering, water management solutions and solar energy
installations and products. This investment represents EMCORE’s
first tranche of its intended $18.0 million investment, in return
for
convertible preferred stock and warrants of WorldWater, equivalent
to
approximately 31% equity ownership in WorldWater, or approximately
26.5%
on a fully diluted basis.
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·
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Also
in November 2006, EMCORE and WorldWater announced the formation of
a
strategic alliance and supply agreement under which EMCORE will be
the
exclusive supplier of high-efficiency multi-junction solar cells,
assemblies and concentrator subsystems to WorldWater with expected
revenue
up to $100.0 million over the next 3
years.
|
Please
refer to Risk Factors under Item 1A, Management’s Discussion and Analysis of
Financial Condition and Results of Operations under Item 7 and Financial
Statements and Supplemental Data under Item 8 for further discussion of these
transactions.
EMCORE’s
Strategy
With
several strategic acquisitions and divestures in the past year, EMCORE has
developed a strong business focus and comprehensive product portfolios in two
main sectors: Fiber Optics and Photovoltaics. Our principal objective
is to maximize shareholder value by leveraging our expertise in advanced
compound semiconductor technologies to be a leading provider of
high-performance, cost-effective product solutions in each of our
markets. Key elements of our strategy include:
Enhance
Our Technology and Expand Our Product Leadership While Lowering Production
Costs.
Through
substantial investment in research and development and product engineering,
we
seek to expand our leadership position in compound semiconductor-based fiber
optics and photovoltaics solutions. We work with our customers to
enhance the performance of our processes, materials science and fiber optic
module design expertise, and to develop new low-cost components, modules,
subsystems and systems. In each product line, EMCORE offers its customers
advanced cost-competitive solutions, which allows them to be the leaders of
technology and product solutions.
Continue
to Target Large Growth Market Opportunities.
We
target
market opportunities that we believe have large potential growth and where
the
favorable performance characteristics of our products and high volume production
efficiencies may give us a competitive advantage over our competitors. We
believe that as production costs continue to be reduced, existing and new
customers will be compelled to increase their use of our products because of
their attractive performance characteristics and superior value.
Penetrate
the Terrestrial Solar Power Market.
We
are
adapting our high-efficiency solar cell technology, developed for satellite
space power, for terrestrial applications. We believe that solar concentrator
systems assembled using our compound semiconductor solar cells will be
competitive with silicon-based solar power generation systems because our
products are more efficient than silicon and, when combined with the advantages
of concentration, they will result in a lower cost of power
generated.
Expand
Our Customer Relationships and the Breadth of Our Customer
Base.
EMCORE
is
devoted to working directly with its customers from initial product design,
product qualification and manufacturing to product delivery. EMCORE's customer
base includes many of the largest telecommunication and data communication
equipment manufacturers, computer manufacturing companies, and aerospace
companies in the world. We intend to further strengthen our existing
customer relationships and expand our customer base in each of our operating
segments. We work closely with many of our customers to anticipate their current
and future needs through a collaborative process to develop next-generation
technologies to help them achieve their product development objectives and
seek
to develop long-term relationships with leading companies in each of the
industries that we serve.
Pursue
Strategic Acquisitions and Partnerships.
We
are
committed to the ongoing evaluation of strategic opportunities that can expand
our addressable markets and strengthen our competitive position. Where
appropriate, we will acquire additional products, technologies, or businesses
that are complementary to, or broaden the markets in which we operate. We plan
to pursue strategic acquisitions to increase revenues and allow for higher
overhead absorption where such acquisitions can improve our gross
margins.
Recent
acquisitions include:
|
|
·
|
In
April 2007, EMCORE
acquired privately held Opticomm Corporation, of San Diego,
California.
|
|
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·
|
In
January 2006, EMCORE
acquired privately held K2 Optronics, Inc., of Sunnyvale,
California.
|
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·
|
In
December 2005, EMCORE acquired privately held Force, Inc., of
Christiansburg, Virginia.
|
|
|
·
|
In
November 2005, EMCORE acquired privately held Phasebridge, Inc.,
of
Pasadena, California.
|
|
|
·
|
In
May 2005, EMCORE acquired the analog CATV and specialty business
of JDS
Uniphase, of Ewing, NJ.
|
All
of
these acquired businesses have been integrated into EMCORE's Fiber Optics
operating segment.
Restructuring
Programs and Divestitures
EMCORE
is
committed to achieving profitability by increasing revenue through the
introduction of new products, reducing our cost structure and lowering the
breakeven points of our product lines. We have significantly
streamlined our manufacturing operations by focusing on core competencies to
identify cost efficiencies. Where appropriate, we transferred the manufacturing
of certain product lines to low-cost contract manufacturers.
EMCORE’s
restructuring programs are designed to further reduce the number of
manufacturing facilities, in addition to the divesture or exit from selected
businesses and product lines that were not strategic and/or were not capable
of
achieving desired revenue or profitability goals.
Recent
divestitures and facility consolidations include:
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|
·
|
In
August 2007, we announced the consolidation of our North American
fiber
optics engineering and design centers into our main operating sites.
EMCORE's engineering facilities in Virginia, Illinois, and Northern
California will be consolidated into larger primary sites in Albuquerque,
New Mexico and Alhambra, California. The consolidation of these
engineering sites will allow EMCORE to leverage resources within
engineering, new product introduction, and customer
service. The design centers in Virginia and Northern California
have been closed and the design center in Illinois was vacated in
October
2007.
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|
|
·
|
In
October 2006, we announced the move of our corporate headquarters
from
Somerset, New Jersey to Albuquerque, New Mexico. Financial
operations and records have been transferred and the New Jersey facility
was vacated in September 2007.
|
|
|
·
|
In
October 2006, we consolidated our solar panel operations into a
state-of-the-art facility located in Albuquerque, New
Mexico. The establishment of a modern solar panel manufacturing
facility, adjacent to our solar cell fabrication operations, facilitates
consistency as well as reduces manufacturing costs. The benefit
of having these operations located on one site is expected to provide
high
quality, high reliability and cost-effective solar
components. Solar panel production operations ceased at our
California solar panel facility in June 2006 and the facility was
vacated
in December 2006.
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In
August 2006, EMCORE sold its 49% membership interest in GELcore,
LLC to
General Electric Corporation, which owned the remaining 51% membership
interest prior to the transaction, for $100.0 million in
cash.
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In
August 2006, EMCORE completed the sale of the assets of its Electronic
Materials & Device division, including inventory, fixed assets, and
intellectual property to IQE plc, a public limited company organized
under
the laws of the United Kingdom, for $16.0
million.
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In
April 2005, EMCORE divested product technology focused on gallium
nitride-based power electronic devices for the power device
industry. The new company, Velox Semiconductor Corporation (Velox),
initially raised $6.0 million from various venture capital
partnerships. EMCORE contributed intellectual property and equipment
in exchange for an initial 19.2% stake in
Velox.
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Our
results of operations and financial condition have and will continue to be
significantly affected by severance, restructuring charges, impairment of
long-lived assets and idle facility expenses incurred during facility closing
activities. Please refer to Risk Factors under Item 1A, Management’s
Discussion and Analysis of Financial Condition and Results of Operations under
Item 7 and Financial Statements and Supplemental Data under Item 8 for further
discussion of these items.
We
derive
a portion of our revenue from funding of research contracts or subcontracts
by
various agencies of the U.S. Government. These contracts typically cover work
performed over extended periods of time, from several months up to several
years. These contracts may be modified or terminated at the convenience of
the
U.S. Government and may be subject to government budgetary fluctuations. In
fiscal 2006, 2005, and 2004, government research contract funding represented
8%, 8% and 3% of our total consolidated revenue, respectively.
EMCORE
had been engaged in a multi-year cost reimbursable solar cell development and
production contract for a major U.S. aerospace corporation. It was previously
reported that the contract would exceed $40.0 million in development and
production revenues over the next several years. Although we
recognized significant revenues for this program during fiscal 2007, our
customer notified us in August 2007 that their program had been terminated
by
the U.S. Government for its convenience. We adjusted our order
backlog accordingly and this will have no effect on our fiscal 2008 revenue
guidance. In fiscal 2008, we expect to recognize additional revenue
from this program related to contract termination costs. We also
expect revenue in fiscal 2008 from a new U.S. Government contract that has
similar technical contract requirements.
Please
refer to Risk Factors under Item 1A, Management’s Discussion and Analysis of
Financial Condition and Results of Operations under Item 7 and Financial
Statements and Supplemental Data under Item 8 for further discussion of
government contracts.
Sales
and Marketing
We
sell
our products worldwide through our dedicated sales force, external sales
representatives and distributors and application engineers. Our sales force
communicates with our customers’ engineering, manufacturing and purchasing
personnel to determine product design, qualifications, performance and cost.
Our
strategy is to use our dedicated sales force to sell to key accounts and to
expand our use of external sales representatives for increased coverage in
international markets and some domestic segments.
Throughout
our sales cycle, we work closely with our customers to qualify our products
into
their product lines. As a result, we develop strategic and long-lasting customer
relationships with products and services that are tailored to our customers’
requirements.
We
focus
our marketing communications efforts on increasing brand awareness,
communicating our technologies’ advantages and generating leads for our sales
force. We use a variety of marketing methods, including our website,
participation at trade shows and selective advertising to achieve these
goals.
Externally,
our marketing group works with customers to define requirements, characterize
market trends, define new product development activities, identify cost
reduction initiatives and manage new product
introductions. Internally, our marketing group communicates and
manages customer requirements with the goal of ensuring that our product
development activities are aligned with our customers’ needs. These
product development activities allow our marketing group to manage new product
introductions and product and market trends.
Please
refer to Risk Factors under Item 1A, Management’s Discussion and Analysis of
Financial Condition and Results of Operations under Item 7 and Financial
Statements and Supplemental Data under Item 8 for further discussion of sales
and marketing, including information regarding our customers and geographic
areas in which we do business.
Manufacturing
As
of
September 30, 2006, we had thirteen dedicated MOCVD (Metal Organic Chemical
Vapor Deposition) systems for both research and production, which are capable
of
processing virtually all compound semiconductor materials and
devices. Our operations include wafer fabrication, device design and
production, fiber optic module, subsystem and system design and manufacture,
and
solar panel engineering and assembly. Many of our manufacturing
operations are computer monitored or controlled to enhance production output
and
statistical control. We employ a strategy of minimizing ongoing capital
investments, while maximizing the variable nature of our cost structure. We
maintain supply agreements with many key suppliers through our supply chain
management function. Where we can gain cost advantages while maintaining quality
and intellectual property control, we outsource the production of certain
subsystems, components and subassemblies to contract manufacturers located
outside of the U.S. Our contract manufacturing supply chain is an
integral part of enabling this strategy. We develop assembly and testing
procedures, and then transfer these procedures overseas. Our contract
manufacturers must maintain comprehensive quality and delivery systems, and
we
continuously monitor them for compliance.
Our
various manufacturing processes involve extensive quality assurance systems
and
performance testing. Our facilities have acquired and maintain certification
status for their quality management systems. Our manufacturing facilities
located in New Mexico and California are registered to ISO 9001
standards.
In
May
2007, EMCORE announced the opening of a new manufacturing facility in Langfang,
China. Our new company, Langfang EMCORE Optoelectronics Co. Ltd., is located
approximately 20 miles southeast of Beijing and currently occupies a space
of
22,000 square feet with a Class-10,000 clean room for optoelectronic device
packaging. Another 60,000 square feet is available for future
expansion. We will transfer our most cost sensitive optoelectronic
devices to this facility. This facility, along with a strategic
alignment with our existing contract-manufacturing partners, should enable
us to
improve our cost structure and gross margins. We also expect to develop and
provide improved service to our global customers by having a local presence
in
Asia.
Please
refer to Risk Factors under Item 1A and Management’s Discussion and Analysis of
Financial Condition and Results of Operations under Item 7 for further
discussion of manufacturing activities.
Sources
of Raw Materials
We
depend
on a limited number of suppliers for certain raw materials, components and
equipment used in our products. We continually review our vendor relationships
to mitigate risks and improve costs, especially where we depend on one or two
vendors for critical components or raw materials. While maintaining inventories
that we believe are sufficient to meet our near-term needs, we generally do
not
carry significant inventories of raw materials. Accordingly, we maintain ongoing
communications with our vendors in order to prevent any interruptions in supply,
and have implemented a supply-chain management program to maintain quality
and
lower purchase prices through standardized purchasing efficiencies and design
requirements. To date, we generally have been able to obtain sufficient
quantities of quality supplies in a timely manner.
Please
refer to Risk Factors under Item 1A for further discussion of our reliance
upon
sole or limited sources of raw materials.
Research
and Development
Our
research and development (R&D) efforts have been focused on maintaining our
technological leadership position by working to improve the quality and
attributes of our product lines. We also invest significant resources to develop
new products and production technology to expand into new market opportunities
by leveraging our existing technology base and infrastructure. Our industry
is
characterized by rapid changes in process technologies with increasing levels
of
functional integration. Our efforts are focused on designing new proprietary
processes and products, on improving the performance of our existing materials,
components and subsystems, and on reducing costs in the product manufacturing
process.
As
of
September 30, 2006, we had 3 MOCVD systems dedicated to R&D
efforts. The R&D staff utilizes x-ray, optical and electrical
characterization equipment, as well as device and module fabrication and testing
equipment, which generate data rapidly, allowing for shortened development
cycles and rapid customer response.
During
fiscal 2006, 2005 and 2004, we invested $19.7 million, $16.5 million, and $20.1
million in R&D activities, respectively. As a percentage of
revenues, R&D represented 14%, 14%, and 25% for fiscal 2006, 2005 and 2004,
respectively. As part of the ongoing effort to cut costs, many of our
projects are used to develop lower cost versions of our existing products.
We
also actively compete for R&D funds from Government agencies and other
entities. In view of the high cost of development, we solicit research contracts
that provide opportunities to enhance our core technology base and promote
the
commercialization of targeted products. Generally, internal R&D funding is
used for the development of products that will be released within 12 months
and
external funding is used for longer-range R&D efforts.
EMCORE’s
Photovoltaics division announced the following new product developments and
launches:
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In
August 2007, our production terrestrial concentrator cell reached
a new
level of performance, attaining 39% peak conversion efficiency under
concentrated illumination conditions. This advancement is an evolution
of
EMCORE's proven concentrator triple junction (CTJ) production technology,
with which several million CTJ solar cells have been produced and
shipped
to concentrator photovoltaic system manufacturers worldwide. We believe
that EMCORE's continuing investment in technology innovation will
enable
the introduction of concentrator solar cell products with conversion
efficiencies over
40%.
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In
May 2007, we announced a solar conversion efficiency of 31% for an
entirely new class of advanced multi-junction solar cells optimized
for
space applications. The new solar cell, referred to as the Inverted
Metamorphic (IMM) design, is composed of a novel combination of compound
semiconductors that enables a superior response to the solar spectrum
compared to conventional multi-junction solar cells. Due to its innovative
design, the IMM cell is approximately one fifteenth the thickness
of the
conventional multi-junction solar cell. We expect that the IMM cell,
developed in conjunction with the Vehicle Systems Directorate of
U.S. Air
Force Research Laboratory, will enable a new class of extremely
lightweight, high-efficiency, and flexible solar arrays that we believe
will power the next generation of spacecrafts and satellites and
will form
a platform for future generations of terrestrial concentrator
products.
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In
March
2007, EMCORE’s Fiber Optics division announced the following new product
development and launches:
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10GBASE-LRM
(long reach multimode) SFP+ Optical Transceiver Module. The LRM SFP+
product expands EMCORE's 10G product portfolio into additional market
niches and platforms, which is a part of EMCORE's strategy to provide
a
complete suite of modules for legacy multimode customer
applications.
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Full
Band Tunable Long Reach Small Form Factor Transponder and 1550nm
DWDM Long
Reach XFP Optical Transceiver Module for 10G
Applications. These products mark the continued expansion of
EMCORE's market leading portfolio of parallel VCSEL and LX4 optical
modules for the 300m multimode market into the long reach 10G application
space.
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Double
Data Rate (DDR) 12 Channel 60G Modules. The MTX/RX9552 is a 12
channel 60G DDR product that doubles the speed of the existing single
data
rate (SDR) SNAP12. The DDR modules are currently sampling to customers
at
data rates of 5G per channel featuring low power consumption and
an
improved digital management interface. The Mini, MTX/RX9542, is
the second new product offering that offers DDR bandwidth with less
than
half the footprint. Originally designed for broad temperature range
military applications, the Mini's small form factor allows commercial
end
users to dramatically increase card density and
bandwidth.
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1.244G
Burst-Mode, ITU G.984 compliant APD/TIA for the rapidly expanding
Gigabit
Passive Optical Network (GPON) OLT market. EMCORE has created
APD/TIA packaged components for the rapidly expanding North American
GPON
OLT Fiber-to-the-Home (FTTH)
market.
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1310
10G Fabry-Perot LC Transmit Optical Sub Assembly (TOSA) designed
to meet
the emerging market of 10G SFP+ and XFP 10G-LRM modules. This
new product offering expands EMCORE's product base in 10G over multimode
fiber applications by providing key components for LRM modules. LRM
is an
emerging technology that provides 10G transmission speeds over 220m
multi-mode optical fiber links as defined by the IEEE 802.3aq 10G-LRM
standard.
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Please
refer to Risk Factors under Item 1A, Management’s Discussion and Analysis of
Financial Condition and Results of Operations under Item 7 and Financial
Statements and Supplemental Data under Item 8 for further discussion of our
R&D efforts.
Intellectual
Property and Licensing
We
protect our proprietary technology by applying for patents where appropriate
and
in other cases by preserving the technology, related know-how and information
as
trade secrets. The success and competitive position of our product lines depend
significantly on our ability to obtain intellectual property protection for
our
R&D efforts. We also acquire, through license grants or assignments, rights
to patents on inventions originally developed by others. As of September 30,
2006, we held approximately 85 U.S. patents and 8 foreign patents. Also, we
have
over 100 additional patent applications pending. Our U.S. patents will expire
on
varying dates between 2009 and 2024. These patents and patent
applications claim various aspects of current or planned commercial versions
of
our materials, components, subsystems and systems.
We
also
have entered into license agreements with the licensing agencies of universities
and other organizations, under which we have obtained exclusive or non-exclusive
rights to practice inventions claimed in various patents and applications issued
or pending in the U.S. and other foreign countries. We do not believe the
financial obligations under any of these agreements materially adversely affect
our business, financial condition or results of operations.
We
rely
on trade secrets to protect our intellectual property when we believe that
publishing patents would make it easier for others to reverse engineer our
proprietary processes. A “trade secret” is information that has value to the
extent it is not generally known, not readily ascertainable by others through
legitimate means, and protected in a way that maintains its secrecy. Reliance
on
trade secrets is only an effective business practice insofar as trade secrets
remain undisclosed and a proprietary product or process is not reverse
engineered or independently developed. To protect our trade secrets, we take
certain measures to ensure their secrecy, such as partitioning the non-essential
flow of information between our different groups and executing non-disclosure
agreements with our employees, joint venture partners, customers and suppliers.
We also rely upon other intellectual property rights such as trademarks and
copyrights where appropriate.
As
is
typical in our industry, from time to time, we have sent letters to, and
received letters from, third parties regarding the assertion of patent or other
intellectual property rights in connection with certain of our products and
processes. On September 11, 2006, we filed a lawsuit against Optium Corporation
(Optium) for patent infringement. In the suit, EMCORE and JDS Uniphase
Corporation (JDSU) allege that Optium is infringing on U.S. patents 6,282,003
and 6,490,071 with its Prisma II 1550nm transmitters. On March 14, 2007, EMCORE
and JDSU filed a second patent suit against Optium on JDSU's patent
6,519,374. On March 15, 2007, Optium Corporation filed a declaratory
judgment action against the Company and JDSU. Optium seeks in this litigation
a
declaration that certain products of Optium do not infringe United States Patent
No. 6,519,374 ("the '374 patent") and that the patent is invalid. The '374
patent is assigned to JDSU and licensed to the Company. Other than the filing
of
a Complaint, Optium has taken no action in this case, and the Company has not
been served.
In
connection with our sale of the capital equipment business in November 2003,
we
retained a license to all MOCVD system-related technology. We intend to use
this
license to further optimize the performance of our own reactors and develop
improvements to our hardware that will increase yields on existing products
and
enable the fabrication of advanced wide-band gap materials.
Please
refer to Risk Factors under Item 1A, Legal Proceedings under Item 3,
Management’s Discussion and Analysis of Financial Condition and Results of
Operations under Item 7 and Financial Statements and Supplemental Data under
Item 8 for further discussion of intellectual property.
Environmental
Regulations
We
are
subject to federal, state, and local laws and regulations concerning the use,
storage, handling, generation, treatment, emission, release, discharge, and
disposal of certain materials used in our R&D and production operations, as
well as laws and regulations concerning environmental remediation, homeland
security, and employee health and safety. The production of wafers and devices
involves the use of certain hazardous raw materials, including, but not limited
to, ammonia, phosphine, and arsine. If our control systems are
unsuccessful in preventing release of these or other hazardous materials or
we
fail to comply with such environmental provisions, our actions, whether
intentional or inadvertent, could result in fines and other liabilities to
the
U.S. Government or third parties, and injunctions requiring us to suspend or
curtail operations which could have a material adverse effect on our
business.
We
have
in-house professionals to address compliance with applicable environmental,
homeland security, and health and safety laws and regulations. We believe that
we are currently in compliance with all applicable environmental laws, including
the Resource Conservation and Recovery Act.
Please
refer to Risk Factors under Item 1A for further discussion of our compliance
efforts associated with environmental regulations.
Competition
The
markets for our products in each of our operating segments are extremely
competitive and are characterized by rapid technological change, frequent
introduction of new products, short product life cycles and significant price
erosion. We face actual and potential competition from numerous domestic and
international companies. Many of these companies have greater engineering,
manufacturing, marketing and financial resources than we have. Partial lists
of
these competitors within the markets we participate in include:
Fiber
Optics
CATV
Networks. Our competitors include Hitachi Yagi and Optium
Corporation at the subsystem level and Applied Optoelectronics, Inc. and Eudyna
Device, Inc. at the component product level.
FTTP
and Telecommunications Networks. Our competitors include
Cyoptics, JDSU, Mitsubishi, MRV Communications, and Sumitomo for
telecommunications and FTTP components. For 10G transceivers and
parallel optical modules, our principal competitors include Avago, Finisar
Corporation, JDSU, Opnext, Inc. and numerous smaller vendors.
Data
Communications, Storage Area Networks and Consumer
Products. Our competitors include Avago, Finisar, Hitachi
Cable and Opnext and numerous smaller vendors.
Satellite
Communications Networks. Our primary competitors are
Foxcom and MITEQ, Inc.
Video
Transport Products. Our primary competitors are Evertz and
Telecast.
Defense
and Homeland Security. The competitors in RF transport for defense and
homeland security products include Aegis Technologies, Gemfire Corporation,
Linear Photonics, LLC, JDSU and Optium.
Photovoltaics
Satellite
Power Generation. In the market for satellite power
photovoltaics products, we primarily compete with Azure Solar GmbH, Sharp and
Spectrolab, Inc., a subsidiary of Boeing.
Terrestrial
Power Generation. In the market for terrestrial power
photovoltaics products, we primarily compete with Azure Solar GmbH and
Spectrolab, Inc. in the solar cell market and Amonix, Concentrix, Energy
Innovations, Solar Systems Pty, and SolFocus in the solar power systems
market.
In
addition to the companies listed above, we compete with many research
institutions and universities for research contract funding. We also sell our
products to current competitors and companies with the capability of becoming
competitors. As the markets for our products grow, new competitors are likely
to
emerge and current competitors may increase their market share. In the EU,
political and legal requirements encourage the purchase of EU-produced goods,
which may put us at a competitive disadvantage against our European
competitors.
There
are
substantial barriers to entry by new competitors across our product lines.
These
barriers include the large number of existing patents, the time and costs to
be
incurred to develop products, the technical difficulty in manufacturing
semiconductor products, the lengthy sales and qualification cycles and the
difficulties in hiring and retaining skilled employees with the required
scientific and technical backgrounds. We believe that the primary competitive
factors within our current markets are yield, throughput, performance, breadth
of product line, product heritage, customer satisfaction and customer commitment
to competing technologies. Competitors may develop enhancements to or future
generations of competitive products that offer superior price and performance
characteristics. We believe that in order to remain competitive, we must invest
significant financial resources in developing new product features and
enhancements and in maintaining customer satisfaction worldwide.
Order
Backlog
As
of
September 30, 2006, we had an order backlog of approximately $48 million as
compared to a backlog from continuing operations of approximately $34 million
from the prior year.
As
of
June 30, 2007, order backlog increased to approximately $121
million. The significant increase in order backlog is attributable to
the receipt of long-term photovoltaics-related sales contracts, of which
approximately $45 million is scheduled for shipment after June 30,
2008.
EMCORE
had been engaged in a multi-year cost reimbursable solar cell development and
production contract for a major U.S. aerospace corporation. It was previously
reported that the contract would exceed $40.0 million in development and
production revenues over the next several years. Although we
recognized significant revenues for this program during fiscal 2007, our
customer notified us in August 2007 that their program had been terminated
by
the U.S. Government for its convenience. We adjusted our order
backlog; however, this had no effect on our fiscal 2008 revenue
guidance. In fiscal 2008, we expect to recognize additional revenue
from this program related to contract termination costs. We also
expect revenue in fiscal 2008 from a new U.S. Government contract that has
similar technical contract requirements.
Customers
may ask us to delay shipment of certain orders and our backlog could also be
adversely affected if customers unexpectedly cancel purchase orders accepted
by
us. A majority of our fiber optics products typically ship within the
same quarter as when the purchase order is received; therefore, our backlog
at
any particular date is not necessarily indicative of actual revenue or the
level
of orders for any succeeding period.
Employees
As
of
September 30, 2006, we had 750 employees of whom 54 had a Ph.D.
degree. Our year-end headcount included 450 employees in
manufacturing operations, 107 employees in R&D, 152 employees in sales,
general and administration (SG&A), and 41 temporary employees. This
represented a net increase of 100 employees or 15% from September 30, 2005.
Headcount as of September 30, 2005 of 650 employees included 52 employees
associated with businesses sold by EMCORE during fiscal 2006.
None
of
our employees are covered by a collective bargaining agreement, nor have we
ever
experienced any labor-related work stoppage. Generally, we believe
our employee relations are good.
Competition
is intense in the recruiting of personnel in the semiconductor
industry. Our ability to attract and retain qualified personnel is
essential to our continued success. We are focused on retaining key
contributors, developing our staff and cultivating their level of
commitment.
Our
disclosure and analysis in this 2006 Annual Report on Form 10-K contain some
forward-looking statements, within the meaning of Section 27A of the
Securities Act and Section 21E of Exchange Act, that set forth anticipated
results based on management’s plans and assumptions. From time to time, we also
provide forward-looking statements in other materials we release to the public
as well as oral forward-looking statements. These statements are based largely
on our current expectations and projections about future events and financial
trends affecting the financial condition of our business. They relate
to future events or our future financial performance and involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, levels of activity, performance or achievements of our business or
our
industry to be materially different from those expressed or implied by any
forward-looking statements. Such statements include, in particular, projections
about our future results, statements about our plans, strategies, business
prospects, changes and trends in our business and the markets in which we
operate. These forward-looking statements may be identified by the
use of terms and phrases such as “expects”, “anticipates”, “intends”, “plans”,
“believes”, “estimates”, “targets”, “can”, “may”, “could”, “will”, and
variations of these terms and similar phrases.
We
cannot guarantee that any forward-looking statement will be realized, although
we believe we have been prudent in our plans and assumptions. Achievement of
future results is subject to risks, uncertainties and potentially inaccurate
assumptions. Should known or unknown risks or uncertainties materialize, or
should underlying assumptions prove inaccurate, actual results could differ
materially from past results and those anticipated, estimated or projected.
You
should bear this in mind as you consider forward-looking
statements.
We
undertake no obligation to publicly update forward-looking statements, whether
as a result of new information, future events or otherwise. You are advised,
however, to consult any further disclosures we make on related subjects in
our
10-Q and 8-K reports to the SEC. Also note that we provide the following
cautionary discussion of risks, uncertainties and possibly inaccurate
assumptions relevant to our businesses. These are factors that, individually
or
in the aggregate, we think could cause our actual results to differ materially
from expected and historical results. We note these factors for investors as
permitted by the Private Securities Litigation Reform Act of 1995. You should
understand that it is not possible to predict or identify all such factors.
Consequently, you should not consider the following to be a complete discussion
of all potential risks or uncertainties.
The
discovery that we had incorrectly priced stock options and had not accounted
for
them correctly has had, and may continue to have, a material adverse effect
on
our financial results.
We
cannot
predict the outcome of the pending shareholder lawsuits or our non-public SEC
investigation, and we may face additional actions, shareholder lawsuits,
governmental investigations and actions on other legal proceedings related
to
our historical stock option practices and the remedial actions we have taken.
All of these events have required us, and will continue to require us, to expend
significant management time and incur significant accounting, legal, consulting
and other expenses. This could require significant additional attention and
resources from the operation of our business and adversely affect our financial
condition and results of operations.
The
Special Committee investigation of our historical stock option practices and
resulting restatements has been time consuming and expensive, and has had a
material adverse effect on our financial condition.
The
Special Committee investigation and restatement activities have required us
to
expend significant management time and incur significant accounting, legal,
consulting and other expenses. The resulting restatements have had a material
adverse effect on our results of operations.
We
have not been in compliance with SEC reporting requirements and NASDAQ listing
requirements and may continue to face compliance issues with both. If we are
unable to remain in compliance with SEC reporting requirements and NASDAQ
listing requirements, there may be a material adverse effect on the Company
and
our shareholders.
Due
to
the Special Committee investigation and resulting restatements, we did not
file
our periodic reports with the SEC on time and faced the possibility of delisting
of our stock from the NASDAQ Global Market. With the filing of this Annual
Report and our Quarterly Reports on Form 10-Q thereafter for the quarters ended
December 31, 2006, March 31, 2007, and June 30, 2007, we believe we will return
to full compliance with SEC reporting requirements and NASDAQ listing
requirements and, therefore, the NASDAQ delisting matter would be
resolved. However, if the SEC has comments on these reports (or other
reports that we previously filed) that require us to file amended reports,
or if
the NASDAQ does not concur that we are in compliance with applicable listing
requirements, we may be unable to maintain an effective listing of our stock
on
NASDAQ. If this happens, the price of our stock and the ability of
our shareholders to trade in our stock could be adversely affected. In addition,
we would be subject to a number of restrictions regarding the registration
of
our stock under federal securities laws, and we would not be able to issue
stock
options or other equity awards to our employees or allow them to exercise their
outstanding options, which could adversely affect our business and results
of
operations.
We
have been named as a party to shareholder derivative lawsuits relating to our
historical stock option practices, and we may be named in additional
securities-related lawsuits in the future. Additional lawsuits could
become time consuming and expensive and could result in the payment of
significant judgments and settlements, which could have a material adverse
effect on our financial condition, results of operations and cash
flows.
In
connection with our historical stock option practices, three derivative actions
were filed against certain of our current and former directors and officers
purporting to assert claims on the Company’s behalf. Although we have reached a
settlement in principle with the plaintiffs in these lawsuits, see Item 3.
Legal
Proceedings, there may be additional derivative or class action lawsuits filed
in the future. Additional lawsuits could become time consuming and
expensive, and if they result in unfavorable outcomes, there could be a material
adverse effect on our business, financial condition, results of operations
and
cash flows. We
may be
required to pay substantial damages or settlement costs in excess of our
insurance coverage related to these matters, which could have a further material
adverse effect on our financial condition or results of operations.
In
addition, subject to certain limitations, we are obligated to indemnify our
current and former directors, officers and employees in connection with the
investigation of our historical stock option practices and the related
shareholder litigation and government investigation. We currently hold insurance
policies for the benefit of our directors and officers, although our insurance
coverage may not be sufficient in some or all of these matters. Furthermore,
the
insurers may seek to deny or limit coverage in some or all of these matters,
in
which case we may have to self-fund all or a substantial portion of our
indemnification obligations.
We
are subject to the risk of employee lawsuits in connection with our historical
stock option practices, the resulting restatements, and the remedial measures
we
have taken.
In
addition to the possibilities that there may be additional governmental
investigations or actions and shareholder lawsuits against us, we may be
involved with future litigation by former officers and employees in connection
with their stock options, employment terminations and other matters. These
lawsuits may be time consuming and expensive, and cause further distraction
from
the operation of our business. The adverse resolution of any specific lawsuit
could have a material adverse effect on our business, financial condition and
results of operations.
It
may be difficult or costly to obtain director and officer insurance coverage
as
a result of our stock options problems.
We
expect
that the issues arising from our misdated stock options may make it more
difficult to obtain director and officer insurance coverage in the future.
If we are able to obtain this coverage, it could be significantly more costly
than in the past, which would have an adverse effect on our financial results
and cash flow. As a result of this and related factors, our directors and
officers could face increased risks of personal liability in connection with
the
performance of their duties. As a result, we may have difficultly attracting
and
retaining qualified directors and officers, which could adversely affect our
business.
We
have a history of incurring significant net losses and our future profitability
is not assured.
We
commenced operations in 1984 and as of September 30, 2006, we had an accumulated
deficit of $284.9 million. We incurred net income of $54.9 million in fiscal
2006, net loss of $13.5 million in fiscal 2005 and a net loss of $14.0 million
in fiscal 2004. Fiscal 2006 results include the sale of our GELcore
joint venture that resulted in a net gain, before tax, of $88.0
million. Our operating results for future periods are subject to
numerous uncertainties and we cannot assure you that we will not continue to
experience net losses for the foreseeable future. Although our
revenues have grown in recent years, we may be unable to sustain such growth
rates in light of potential changes in market or economic
conditions. In addition, if we are not able to reduce our costs, we
may not be able to achieve profitability.
Our
future revenues are inherently unpredictable. As a result, our
operating results are likely to fluctuate from period to period, which may
cause
volatility in our stock price and may cause our stock price to
decline.
Our
quarterly and annual operating results have fluctuated substantially in the
past
and are likely to fluctuate significantly in the future due to a variety of
factors, some of which are outside of our control. Factors that could
cause our quarterly or annual operating results to fluctuate
include:
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market
acceptance of our products;
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market
demand for the products and services provided by our
customers;
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disruptions
or delays in our manufacturing processes or in our supply of raw
materials
or product components;
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changes
in the timing and size of orders by our
customers;
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cancellations
and postponements of previously placed
orders;
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reductions
in prices for our products or increases in the costs of our raw materials;
and
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the
introduction of new products and manufacturing
processes.
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In
addition, the limited lead times with which several of our customers order
our
products restrict our ability to forecast revenues. We may also
experience a delay in generating or recognizing revenues for a number of
reasons. For example, orders at the beginning of each quarter
typically represent a small percentage of expected revenues for that quarter
and
are generally cancelable at any time. We depend on obtaining orders during
each
quarter for shipment in that quarter to achieve our revenue objectives. Failure
to ship these products by the end of a quarter may adversely affect our results
of operations.
As
a
result of the foregoing, we believe that period-to-period comparisons of our
results of operations should not be relied upon as indications of future
performance. In addition, our results of operations in one or more
future quarters may fail to meet the expectations of securities analysts or
investors, which would likely result in a decline in the trading price of our
common stock.
We
enter into long-term fixed-price contracts in our Photovoltaics division, which
could subject us to losses if we have cost overruns.
Many
of
our contracts in our Photovoltaics division are contracted on a fixed-price
basis. While firm fixed-price contracts allow us to benefit from cost
savings, they also expose us to the risk of cost overruns. If the initial
estimates we use to calculate the contract price and the cost to perform the
work prove to be incorrect, we could incur losses. In addition, some of our
contracts have specific provisions relating to cost, schedule, and performance.
If we fail to meet the terms specified in those contracts, then our cost to
perform the work could increase or our price could be reduced, which would
adversely affect our financial condition. These programs have risk for
reach-forward losses if our estimated costs exceed our estimated
price.
Fixed-price
development work inherently has more uncertainty than production contracts
and,
therefore, more variability in estimates of the cost to complete the work.
Many
of these development programs have very complex designs. As technical or quality
issues arise, we may experience schedule delays and cost impacts, which could
increase our estimated cost to perform the work or reduce our estimated price,
either of which could adversely affect our financial condition. Some fixed-price
development contracts include initial production units in their scope of work.
Successful performance of these contracts depends on our ability to meet
production specifications and delivery rates. If we are unable to
perform and deliver to contract requirements, our contract price could be
reduced through the incorporation of liquidated damages, termination of the
contract for default, or other financially significant exposure. Management
uses
its best judgment to estimate the cost to perform the work and the price we
will
eventually be paid on fixed-price development programs. While we believe the
cost and price estimates incorporated in the financial statements are
appropriate, future events could result in either favorable or unfavorable
adjustments to those estimates.
Our
ability to achieve operational and material cost reductions and to realize
production efficiencies for our operations is critical to our ability to achieve
long-term profitability.
We
currently are in the process of implementing a number of operational and
material cost reductions and productivity improvement initiatives, particularly
with regards to our Fiber Optics segment. Cost reduction initiatives often
involve facility consolidation and re-design of our products, which requires
our
customers to accept and qualify the new designs, potentially creating a
competitive disadvantage for our products. These initiatives can be
time-consuming and disruptive to our operations and costly in the
short-term. Successfully implementing these and other cost-reduction
initiatives throughout our operations is critical to our future competitiveness
and ability to achieve long-term profitability. However, there can be no
assurance that these initiatives will be successful.
We
are substantially dependent on a small number of customers and the loss of
any
one of these customers could adversely affect our business, financial condition
and results of operations.
In
fiscal
2006, 2005 and 2004, our top five customers accounted for 39%, 49%, and 40%
of
our total annual revenue. In particular, Cisco Systems, Inc.
accounted for 12% of our total revenue in fiscal 2006. There can be
no assurance that we will continue to achieve historical levels of sales of
our
products to our largest customers. The loss of or a reduction in
sales to one or more of our largest customers could have a material adverse
affect on our business, financial condition and results of
operations.
We
may not be successful in obtaining market acceptance and demand for our
terrestrial solar systems.
We
have
invested and intend to continue to invest significant resources in the
adaptation of our high-efficiency compound semiconductor-based GaAs solar cell
products for terrestrial applications, and in mid 2006, EMCORE established
a
wholly-owned subsidiary, EMCORE Solar Power, (“ESP”) to conduct this
business ESP is in the development stage and the
terrestrial solar power business will require substantial additional funding
for
the hiring of employees, research and development and investment in capital
equipment. Factors such as changes in energy prices or the
development of new and efficient alternative energy technologies could limit
growth in or reduce the market for terrestrial solar products. In
addition, we may experience difficulties in applying our satellite-based solar
products to terrestrial applications or we may be unable to compete with new
and
emerging terrestrial solar products. The sale of concentrated
photovoltaic (“CPV”) systems involve the design, manufacture and installation of
large and complex structures intended for outdoor operation, regarding which
the
Company has no previous experience. In addition, it is expected that
much of the market for our CPV systems will be outside the U.S. and will involve
partnering with non-U.S. entities and evaluation and compliance with non-U.S.
laws, regulations, and government electric supply contracts, which are also
new
areas for the Company. There can be no assurance that our bids
on solar power installations will be accepted, that we will win any of these
bids or that our solar concentrator systems will be qualified for these
projects. If our terrestrial solar cell products are not cost
competitive or accepted by the market, our business, financial condition and
results of operations may be materially and adversely affected.
We
depend heavily on U.S. Government contracts, which are subject to unique
risks.
In
2006,
8% of our revenues were derived from U.S. Government contracts. In addition
to
normal business risks, our contracts with the U.S. Government are subject to
unique risks, some of which are beyond our control.
The
funding of U.S. Government programs is subject to congressional
appropriations. Many of the U.S. Government programs in which we
participate may extend for several years; however, these programs are normally
funded annually. Long-term government contracts and related orders are subject
to cancellation if appropriations for subsequent performance periods are not
made. The termination of funding for a U.S. Government program would result
in a
loss of anticipated future revenues attributable to that program, which could
have a materially negative impact on our operations.
The
U.S. Government may modify, curtail or terminate our contracts. The U.S.
Government may modify, curtail or terminate its contracts and subcontracts
without prior notice at its convenience upon payment for work done and
commitments made at the time of termination. Modification, curtailment or
termination of our major programs or contracts could have a material adverse
effect on our results of operations and financial condition.
Our
contract costs are subject to audits by U.S. Government agencies. U.S.
Government representatives may audit the costs we incur on our U.S. Government
contracts, including allocated indirect costs. Such audits could result in
adjustments to our contract costs. Any costs found to be improperly allocated
to
a specific contract will not be reimbursed, and such costs already reimbursed
must be refunded. We have recorded contract revenues based upon costs we expect
to realize upon final audit. However, we do not know the outcome of any future
audits and adjustments and we may be required to reduce our revenues or profits
upon completion and final negotiation of audits. If any audit uncovers improper
or illegal activities, we may be subject to civil and criminal penalties and
administrative sanctions, including termination of contracts, forfeiture of
profits, suspension of payments, fines and suspension or prohibition from doing
business with the U.S. Government.
Our
business is subject to potential U.S. Government inquiries and
investigations. We are sometimes subject to certain U.S. Government
inquiries and investigations of our business practices due to our participation
in government contracts. Any such inquiry or investigation could potentially
result in a material adverse effect on our results of operations and financial
condition.
Our
U.S. Government business is also subject to specific procurement regulations
and
other requirements. These requirements, although customary in U.S.
Government contracts, increase our performance and compliance costs. These
costs
might increase in the future, reducing our margins, which could have a negative
effect on our financial condition. Failure to comply with these regulations
and
requirements could lead to suspension or debarment, for cause, from U.S.
Government contracting or subcontracting for a period of time and could have
a
negative effect on our reputation and ability to secure future U.S. Government
contracts.
If
we do not keep pace with rapid technological change, our products may not be
competitive.
We
compete in markets that are characterized by rapid technological change,
frequent new product introductions, changes in customer requirements, evolving
industry standards, continuous improvement in products and the use of our
existing products in new applications. We may not be able to develop
the underlying core technologies necessary to create new products and
enhancements at the same rate as or faster than our competitors, or to license
the technology from third parties that is necessary for our
products.
Product
development delays may result from numerous factors, including:
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changing
product specifications and customer
requirements;
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unanticipated
engineering complexities;
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expense
reduction measures we have implemented and others we may
implement;
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difficulties
in hiring and retaining necessary technical personnel;
and
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difficulties
in allocating engineering resources and overcoming resource
limitations.
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We
cannot
assure you that we will be able to identify, develop, manufacture, market or
support new or enhanced products successfully, if at all, or on a timely, cost
effective or repeatable basis. Our future performance will depend on our
successful development and introduction of, as well as market acceptance of,
new
and enhanced products that address market changes as well as current and
potential customer requirements and our ability to respond effectively to
product announcements by competitors, technological changes or emerging industry
standards. Because it is generally not possible to predict the amount of time
required and the costs involved in achieving certain research, development
and
engineering objectives, actual development costs may exceed budgeted amounts
and
estimated product development schedules may be extended. If we incur budget
overruns or delays in our research and development efforts, our business,
financial condition and results of operations may be materially adversely
affected.
The
competitive and rapidly evolving nature of our industry has in the past resulted
and is likely in the future to result in reductions in our product prices and
periods of reduced demand for our products.
We
face
substantial competition in each of our operating segments from a number of
companies, many of which have greater financial, marketing, manufacturing and
technical resources than us. Larger-sized competitors often spend more on
research and development, which could give those competitors an advantage in
meeting customer demands and introducing technologically innovative products
before we do. We expect that existing and new competitors will improve the
design of their existing products and will introduce new products with enhanced
performance characteristics.
The
introduction of new products and more efficient production of existing products
by our competitors has resulted and is likely in the future to result in price
reductions and increases in expenses and reduced demand for our
products. In addition, some of our competitors may be willing to
provide their products at lower prices, accept a lower profit margin or expend
more capital in order to obtain or retain business. Competitive
pressures have required us to reduce the prices of some of our products,
including our fiber optic modules and our solar cells. These
competitive forces could diminish our market share and gross margins, resulting
in a material adverse affect on our business, financial condition and results
of
operations.
New
competitors may also enter our markets, including some of our current and
potential customers who may attempt to integrate their operations by producing
their own components and subsystems or acquiring one of our competitors, thereby
reducing demand for our products. In addition, rapid product
development cycles, increasing price competition due to maturation of
technologies, the emergence of new competitors in Asia with lower cost
structures and industry consolidation resulting in competitors with greater
financial, marketing and technical resources could result in lower prices or
reduced demand for our products.
Expected
and actual introductions of new and enhanced products may cause our customers
to
defer or cancel orders for existing products and may cause our products to
become obsolete. A slowdown in demand for existing products ahead of a new
product introduction could result in a write-down in the value of inventory
on
hand related to existing products. We have in the past experienced a slowdown
in
demand for existing products and delays in new product development and such
delays may occur in the future. To the extent customers defer or cancel orders
for existing products due to a slowdown in demand or in anticipation of a new
product release or if there is any delay in development or introduction of
our
new products or enhancements of our products, our business, financial condition
and results of operations could be materially adversely affected.
We
may not be successful in implementing our growth strategy if we are unable
to
identify and acquire suitable acquisition targets. In addition, our
acquisitions may not have the anticipated effect on our financial
results.
Finding
and consummating acquisitions is an important component of our growth strategy.
Our continued ability to grow by acquisition is dependent upon the availability
of suitable acquisition candidates and may be dependent on our ability to obtain
acquisition financing on acceptable terms. We experience competition in making
acquisitions from larger companies with significantly greater resources. There
can be no assurance that we will be able to procure the necessary funds to
effectuate our acquisition strategy on commercially reasonable terms, or at
all.
Future
acquisitions by us may involve the following:
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use
of significant amounts of cash;
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potentially
dilutive issuances of equity securities on potentially unfavorable
terms;
and
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incurrence
of debt on potentially unfavorable
terms.
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In
addition, acquisitions involve numerous risks, including:
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inability
to achieve anticipated synergies;
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difficulties
in the integration of the operations, technologies, products and
personnel
of the acquired company;
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diversion
of management’s attention from other business
concerns;
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risks
of entering markets in which we have limited or no prior
experience;
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potential
loss of key employees of the acquired company or of us;
and
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risk
of assuming unforeseen liabilities or becoming subject to
litigation.
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If
these
factors limit our ability to integrate the operations of our acquisitions
successfully or on a timely basis, our expectations of future results of
operations may not be met. In addition, our growth and operating strategies
for
businesses we acquire may be different from the strategies that such business
currently is pursuing. If our strategies are not the proper strategies for
a
company we acquire, it could materially adversely affect our business, financial
condition and results of operations. Further, there can be no assurance that
we
will be able to maintain or enhance the profitability of any acquired business
or consolidate the operations of any acquired business to achieve cost
savings.
In
addition, there may be liabilities that we fail, or are unable, to discover
in
the course of performing due diligence investigations on each company, business
or asset we have already acquired or may acquire in the future. Such liabilities
could include those arising from employee benefits contribution obligations
of a
prior owner or non-compliance with, or liability pursuant to, applicable
federal, state or local environmental requirements by prior owners for which
we,
as a successor owner, may be responsible. In addition, there may be additional
costs relating to acquisitions including, but not limited to, possible purchase
price adjustments. We cannot assure you that rights to indemnification by
sellers of assets to us, even if obtained, will be enforceable, collectible
or
sufficient in amount, scope or duration to fully offset the possible liabilities
associated with the business or property acquired. Any such liabilities,
individually or in the aggregate, could materially adversely affect our
business, financial condition and results of operations.
In
the
past several years we have completed several acquisitions, which have broadened
our product lines within our target markets and increased the level of vertical
integration within those product lines. However, if customer demand in these
markets does not meet current expectations, our revenues could be significantly
reduced and we could suffer a material adverse affect on our business, financial
condition and results of operations.
Our
products are difficult to manufacture. Our production could be
disrupted and our results will suffer if our production yields are low as a
result of manufacturing difficulties.
We
manufacture many of our wafers and devices in our own production facilities.
Difficulties in the production process, such as contamination, raw material
quality issues, human error or equipment failure, can cause a substantial
percentage of wafers and devices to be nonfunctional. Lower-than-expected
production yields may delay shipments or result in unexpected levels of warranty
claims, either of which can materially adversely affect our results of
operations. We have experienced difficulties in achieving planned yields in
the
past, particularly in pre-production and upon initial commencement of full
production volumes, which have adversely affected our gross margins. Because
the
majority of our manufacturing costs are fixed, achieving planned production
yields is critical to our results of operations. Because we manufacture many
of
our products in a single facility, we have greater risk of interruption in
manufacturing resulting from fire, natural disaster, equipment failures, or
similar events than we would if we had back-up facilities available for
manufacturing these products. We could also incur significant costs
to repair and/or replace products that are defective and in some cases costly
product redesigns and/or rework may be required to correct a
defect. Additionally, any defect could adversely affect our
reputation and result in the loss of future orders.
We
face lengthy sales and qualifications cycles for our new products and, in many
cases, must invest a substantial amount of time and funds before we receive
orders.
Most
of
our products are tested by current and potential customers to determine whether
they meet customer or industry specifications. The length of the qualification
process, which can span a year or more, varies substantially by product and
customer, and thus can cause our results of operations to be unpredictable.
During a given qualification period, we invest significant resources and
allocate substantial production capacity to manufacture these new products
prior
to any commitment to purchase by customers. In addition, it is difficult to
obtain new customers during the qualification period as customers are reluctant
to expend the resources necessary to qualify a new supplier if they have one
or
more existing qualified sources. If we are unable to meet applicable
specifications or do not receive sufficient orders to profitably use the
allocated production capacity, our business, financial condition and results
of
operations could be materially adversely affected.
Our
historical and future budgets for operating expenses, capital expenditures,
operating leases and service contracts are based upon our assumptions as to
the
future market acceptance of our products. Because of the lengthy lead times
required for product development and the changes in technology that typically
occur while a product is being developed, it is difficult to accurately estimate
customer demand for any given product. If our products do not achieve an
adequate level of customer demand, our business, financial condition and results
of operations could be materially adversely affected.
If
our contract manufacturers fail to deliver quality products at reasonable prices
and on a timely basis, our business, financial condition and results of
operations could be materially adversely affected.
We
are
increasing our use of contract manufacturers located outside of the U.S. as
a
less-expensive alternative to performing our own manufacturing of certain
products. Contract manufacturers in Asia currently manufacture a
substantial portion of our high-volume parts. If these contract
manufacturers do not fulfill their obligations to us, or if we do not properly
manage these relationships and the transition of production to these contract
manufacturers, our existing customer relationships may suffer. For example,
in
the past, we experienced difficulties filling orders in our
fiber-to-the-premises business due to capacity limitations at one of our
contract manufacturers. In addition, by undertaking these activities, we run
the
risk that the reputation and competitiveness of our products and services may
deteriorate as a result of the reduction of our ability to oversee and control
quality and delivery schedules. The use of contract manufacturers located
outside of the U.S. also subjects us to the following additional risks that
could significantly impair our ability to source our contract manufacturing
requirements internationally, including:
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unexpected
changes in regulatory requirements;
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legal
uncertainties regarding liability, tariffs and other trade
barriers;
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inadequate
protection of intellectual property in some
countries;
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greater
incidence of shipping delays;
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greater
difficulty in hiring talent needed to oversee manufacturing operations;
and
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potential
political and economic instability.
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Prior
to
our customers accepting products manufactured at our contract manufacturers,
they must requalify the product and manufacturing processes. The qualification
process can be lengthy and expensive, with no guarantee that any particular
product qualification process will lead to profitable product sales. The
qualification process determines whether the product manufactured at our
contract manufacturer achieves customers’ quality, performance and reliability
standards. Our expectations as to the time periods required to qualify a product
line and ship products in volumes to customers may be erroneous. Delays in
qualification can impair the expected timing of the transfer of a product line
to our contract manufacturer and may impair the expected amount of sales of
the
affected products. We may, in fact, experience delays in obtaining qualification
of products produced by our contract manufacturers and, therefore, our operating
results and customer relationships could be materially adversely
affected.
Our
supply chain and manufacturing process relies on accurate forecasting to provide
us with optimal margins and profitability. Because of market uncertainties,
forecasting is becoming much more difficult. In addition, as we come to rely
more heavily on contract manufacturers, we may have fewer personnel with
expertise to manage these third-party arrangements.
Protecting
our trade secrets and obtaining patent protection is critical to our ability
to
effectively compete.
Our
success and competitive position depend on protecting our trade secrets and
other intellectual property. Our strategy is to rely on trade secrets and
patents to protect our manufacturing and sales processes and products. Reliance
on trade secrets is only an effective business practice if trade secrets remain
undisclosed and a proprietary product or process is not reverse engineered
or
independently developed. We take measures to protect our trade secrets,
including executing non-disclosure agreements with our employees, our joint
venture partners, customers and suppliers. If parties breach these agreements
or
the measures we take are not properly implemented, we may not have an adequate
remedy. Disclosure of our trade secrets or reverse engineering of our
proprietary products, processes, or devices could materially adversely affect
our business, financial condition and results of operations.
There
is
also no assurance that any patents will afford us commercially significant
protection of our technologies or that we will have adequate financial resources
to enforce our patents. Nor can there be any assurance that the
significant number of patent applications that we have filed and are pending,
or
those we may file in the future, will result in patents being
issued. In addition, the laws of certain other countries may not
protect our intellectual property to the same extent as U.S. laws.
Our
failure to obtain or maintain the right to use certain intellectual property
may
materially adversely affect our business, financial condition and results of
operations.
The
compound semiconductor, optoelectronics and fiber optic communications
industries are characterized by frequent litigation regarding patent and other
intellectual property rights. From time to time we have received, and may
receive in the future, notice of claims of infringement of other parties’
proprietary rights and licensing offers to commercialize third party patent
rights. Although we are not currently involved in any litigation relating to
claims of infringement from other parties’ intellectual property, there can be
no assurance that:
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infringement
claims (or claims for indemnification resulting from infringement
claims)
will not be asserted against us or that such claims will not be
successful;
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future
assertions will not result in an injunction against the sale of infringing
products, which could significantly impair our business and results
of
operations;
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any
patent owned or licensed by us will not be invalidated, circumvented
or
challenged; or
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we
will not be required to obtain licenses, the expense of which may
adversely affect our results of operations and
profitability.
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In
addition, effective copyright and trade secret protection may be unavailable
or
limited in certain foreign countries. Litigation, which could result in
substantial cost and diversion of our resources, may be necessary to defend
our
rights or defend us against claimed infringement of the rights of
others. In certain circumstances, our intellectual property rights
associated with government contracts may be limited.
Our
substantial level of indebtedness could materially adversely affect our
business, financial condition and results of
operations.
We
have
substantial debt service obligations. At September 30, 2006, our debt was $95.9
million. In April 2007, we repurchased approximately $11.4 million of the
outstanding debt. We may incur additional debt in the future. This
significant amount of debt could:
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make
it difficult for us to make payments on our convertible notes and
any
other debt we may have;
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make
it difficult for us to obtain any necessary future financing for
working
capital, capital expenditures, debt service requirements or other
purposes;
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make
us more vulnerable to adverse changes in general economic, industry
and
competitive conditions, in government regulation and in our business
by
limiting our flexibility in planning for, and reacting to changing
conditions;
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place
us at a competitive disadvantage compared with our competitors that
have
less debt;
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require
us to dedicate a substantial portion of our cash flow from operations
to
service our debt, which would reduce the amount of our cash flow
available
for other purposes, including working capital and capital expenditures;
and
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limit
funds available for research and
development.
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If
we are
unable to generate sufficient cash flow or otherwise obtain funds necessary
to
make required payments on our outstanding indebtedness, we would be in default
under the terms of our indebtedness. Default under the indenture governing
our
convertible senior subordinated notes would permit the holders of such notes
to
accelerate the maturity of the notes and could cause defaults under future
indebtedness we may incur. Any such default could materially adversely affect
our business, financial condition and results of operations. In addition, we
cannot assure you that we would be able to repay amounts due in respect of
the
notes if payment of the notes were to be accelerated following the occurrence
of
an event of default as defined in the indenture.
In
our Fiber Optics business, we generally do not have long-term contracts with
our
customers and we typically sell our products pursuant to purchase orders with
short lead times. As a result, our customers could stop purchasing
our products at any time and we must fulfill orders in a timely manner to keep
our customers.
Generally,
we do not have long-term contracts with customers that purchase our fiber optic
products. As a result, our agreements with our customers do not
provide any assurance of future sales. Risks associated with the
absence of long-term contracts with our customers include the
following:
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our
customers can stop purchasing our products at any time without
penalty;
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our
customers may purchase products from our competitors;
and
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our
customers are not required to make minimum
purchases.
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We
generally sell our products pursuant to individual purchase orders, which often
have extremely short lead times. If we are unable to fulfill these
orders in a timely manner, it is likely that we will lose sales and
customers. In addition, we sell some of our products to the U.S.
Government and governmental entities. These contracts are generally
subject to termination for convenience provisions and may be cancelled at any
time.
War,
terrorism, public health issues, and other circumstances could disrupt supply,
delivery, or demand of products, which could negatively affect the Company’s
operations and performance.
War,
terrorism, public health issues, and other business interruptions, whether
in
the U.S. or abroad, have caused and could cause damage or disruption to
international commerce and global economy, and thus may have a strong negative
impact on the global economy, the Company, and the Company’s suppliers or
customers. The Company’s major business operations are subject to interruption
by earthquake, other natural disasters, fire, power shortages, terrorist attacks
and other hostile acts, labor disputes, public health issues, and other events
beyond its control.
Although
it is impossible to predict the occurrences or consequences of any such events,
such events could result in a decrease in demand for the Company’s products,
make it difficult or impossible for the Company to deliver products to its
customers or to receive components from its suppliers, and create delays and
inefficiencies in the Company’s supply chain. In addition, should major public
health issues including pandemics arise, the Company could be negatively
affected by more stringent employee travel restrictions, additional limitations
in the availability of freight services, governmental actions limiting the
movement of products between various regions, delays in production ramps of
new
products, and disruptions in the operations of the Company’s manufacturing
vendors and component suppliers. The Company’s operating results and financial
condition have been, and in the future may be, adversely affected by such
events.
We
have significant international sales, which expose us to additional risks and
uncertainties.
Sales
to
customers located outside the U.S. accounted for approximately 24% of our
revenues in fiscal 2006, 17% of our revenues in fiscal 2005 and 32% of our
revenues in fiscal 2004. Sales to customers in Asia represent the majority
of
our international sales. We believe that international sales will continue
to
account for a significant percentage of our revenues and we are seeking
international expansion opportunities. Because of this, the following
international commercial risks may materially adversely affect our
revenues:
|
|
•
|
political
and economic instability or changes in U.S. Government policy with
respect
to these foreign countries may inhibit export of our devices and
limit
potential customers’ access to U.S. dollars in a country or region in
which those potential customers are
located;
|
|
|
•
|
we
may experience difficulties in the timeliness of collection of foreign
accounts receivable and be forced to write off these
receivables;
|
|
|
•
|
tariffs
and other barriers may make our devices less cost
competitive;
|
|
|
•
|
the
laws of certain foreign countries may not adequately protect our
trade
secrets and intellectual property or may be burdensome to comply
with;
|
|
|
•
|
potentially
adverse tax consequences to our customers may damage our cost
competitiveness;
|
|
|
•
|
currency
fluctuations may make our products less cost competitive, affecting
overseas demand for our products;
and
|
|
|
•
|
language
and other cultural barriers may require us to expend additional resources
competing in foreign markets or hinder our ability to effectively
compete.
|
In
addition, certain foreign laws and regulations place restrictions on the
concentration of certain hazardous materials, including, but not limited to,
lead, mercury and cadmium, in our products. Failure to comply with such laws
and
regulations could subject us to future liabilities or result in the limitation
or suspension of the sale or production of our products. These regulations
include the European Union's Restrictions on Hazardous Substances, Directive
on
Waste Electrical and Electronic Equipment and the directive on End of Life
for
Vehicles. Failure to comply with environmental and health and safety laws and
regulations may limit our ability to export products to the EU and could
materially adversely affect our business, financial condition and results of
operations.
We
will lose sales if we are unable to obtain government authorization to export
our products.
Exports
of our products are subject to export controls imposed by the U.S. Government
and administered by the U.S. Departments of State and Commerce. In certain
instances, these regulations may require pre-shipment authorization from the
administering department. For products subject to the Export
Administration Regulations (“EAR”) administered by the Department of Commerce’s
Bureau of Industry and Security, the requirement for a license is dependent
on
the type and end use of the product, the final destination and the identity
of
the end user. Virtually all exports of products subject to the
International Traffic in Arms Regulations (“ITAR”) regulations administered by
the Department of State’s Directorate of Defense Trade Controls require a
license. Most of our fiber optics products and our terrestrial solar
power products are subject to EAR; however, certain fiber optics products and
.
all of our commercially available solar cell satellite products are currently
subject to ITAR.
Given
the
current global political climate, obtaining export licenses can be difficult
and
time-consuming. For example, we did not receive export licenses
covering three international satellite programs in time to ship product during
the fourth quarter of fiscal year 2006. Failure to obtain export
licenses for these shipments could significantly reduce our revenue and could
materially adversely affect our business, financial condition and results of
operations. Compliance with U.S. Government regulations may also subject us
to
additional fees and costs. The absence of comparable restrictions on competitors
in those countries may adversely affect our competitive position.
Our
operating results could be harmed if we lose access to sole or limited sources
of materials, components or services.
We
currently obtain some materials, components and services used in our products
from limited or single sources. For example, we obtain germanium
substrates for our space-based solar cells from a single supplier. We
generally do not carry significant inventories of any raw materials. Because
we
often do not account for a significant part of our suppliers' businesses, we
may
not have access to sufficient capacity from these suppliers in periods of high
demand. For example, in the past, we experienced difficulties filling orders
in
our fiber-to-the-premises business due to limited available capacity of one
of
our contract manufacturers. In addition, since we generally do not have
guaranteed supply arrangements with our suppliers we risk serious disruption
to
our operations if an important supplier terminates product lines, changes
business focus, or goes out of business. Because some of these suppliers are
located overseas, we may be faced with higher costs of purchasing these
materials if the U.S. dollar weakens against other currencies. If we were to
change any of our limited or sole source suppliers, we would be required to
re-qualify each new supplier. Re-qualification could prevent or delay product
shipments that could materially adversely affect our results of operations.
In
addition, our reliance on these suppliers may materially adversely affect our
production if the components vary in quality or quantity. If we are unable
to
obtain timely deliveries of sufficient components of acceptable quality or
if
the prices of components for which we do not have alternative sources increase,
our business, financial condition and results of operations could be materially
adversely affected.
A
failure to attract and retain technical and other key personnel could reduce
our
revenues and our operational effectiveness.
Our
future success depends, in part, on our ability to attract and retain certain
key personnel, including scientific, operational, financial, and managerial
personnel. The competition for attracting and retaining these employees
(especially scientists, technical and financial personnel) is intense. Because
of this competition for skilled employees, we may be unable to retain our
existing personnel or attract additional qualified employees in the future.
If
we are unable to retain our skilled employees and attract additional qualified
employees to the extent necessary to keep up with our business demands and
changes, our business, financial condition and results of operations may be
materially adversely affected.
The
Company's operating results could be adversely affected by the departure of
senior management or key personnel.
The
loss
of senior management and key personnel - either as a group or on an individual
basis - could have a materially adverse affect on the Company's business and
financial performance. Due to the recent departure of several senior
management members (including the Chief Operating Officer, Chief Financial
Officer, Chief Technology Officer, General Counsel and the head of one of our
operating divisions), the Company is implementing procedures to make it less
dependent on key individuals so that it is less likely that the loss of any
single individual will impact its business.
Failure
to comply with environmental and safety regulations, resulting in improper
handling of hazardous raw materials used in our manufacturing processes, could
result in costly remediation fees, penalties or
damages.
We
are
subject to laws and regulations and must obtain certain permits and licenses
relating to the use of hazardous materials. Our production activities involve
the use of certain hazardous raw materials, including, but not limited to,
ammonia, gallium, phosphine and arsine. If our control systems are unsuccessful
in preventing a release of these materials into the environment or other adverse
environmental conditions or human exposures occur, we could experience
interruptions in our operations and incur substantial remediation and other
costs or liabilities.
Our
stock price could be adversely affected by the issuance of preferred
stock.
Our
Board
of Directors is authorized to issue up to 5,882,352 shares of preferred stock
with such dividend rates, liquidation preferences, voting rights, redemption
and
conversion terms and privileges as our Board of Directors, in its sole
discretion, may determine. The issuance of shares of preferred stock may result
in a decrease in the value or market price of our common
stock. Additionally, our Board of Directors could use the preferred
stock to delay or discourage hostile bids for control of us in which
shareholders may receive premiums for their common stock or to make the possible
sale of EMCORE or the removal of our management more difficult. The issuance
of
shares of preferred stock could adversely affect the voting and other rights
of
the holders of common stock and may depress the price of our common
stock.
We
do not intend to pay cash dividends on our common stock in the foreseeable
future, and therefore only appreciation of the price of our common stock will
provide a return to our shareholders.
We
currently anticipate that we will retain all future earnings, if any, to finance
the growth and development of our business. We do not intend to pay cash
dividends in the foreseeable future. As a result, only appreciation of the
price
of our common stock, which may not occur, will provide a return to our
shareholders.
Changes
in accounting rules could affect the Company’s future operating
results.
Financial
statements are prepared in accordance with U.S. generally accepted accounting
principles (GAAP). These principles are subject to interpretation by various
governing bodies, including the Financial Accounting Standards Board (FASB)
and
the SEC, who create and interpret appropriate accounting standards. A change
in
accounting standards could have a significant effect on the Company’s results of
operations. For example, in December 2004, the FASB issued new
guidance that addressed the accounting for share-based payments, Statement
of
Financial Accounting Standards No. 123(R), “Share-Based Payment (revised
2004)” (“SFAS 123(R)”), which the Company adopted on October 1,
2005. In fiscal 2006, stock-based compensation expense reduced
diluted earnings per common share by approximately $0.09 per share. Although
the
adoption of SFAS 123(R) is expected to continue to have a significant impact
on
the Company’s results of operations, future changes to various assumptions used
to determine the fair value of equity awards issued or the amount and type
of
equity awards granted, create uncertainty as to the amount of future stock-based
compensation expense.
We
are subject to risks associated with the availability and coverage of
insurance.
For
certain risks, the Company does not maintain insurance coverage because of
cost
and/or availability. Because the Company retains some portion of its insurable
risks, and in some cases self-insures completely, unforeseen or catastrophic
losses in excess of insured limits may have a material adverse effect on the
Company’s results of operations and financial position.
We
are increasing operations in China, which exposes us to risks inherent in doing
business in China.
In
May
2007, EMCORE Hong Kong, a wholly owned subsidiary of EMCORE Corporation,
announced the opening of a new manufacturing facility in Langfang, China. Our
new company, Langfang EMCORE Optoelectronics Co. Ltd., is located approximately
20 miles southeast of Beijing and currently occupies a space of 22,000 square
feet with a Class-10,000 clean room for optoelectronic device
packaging. Another 60,000 square feet is available for future
expansion. EMCORE will transfer its most cost sensitive
optoelectronic devices to this facility. This facility, along with a
strategic alignment with our existing contract-manufacturing partners, should
enable us to improve our cost structure and gross margins across product lines
within EMCORE. We expect to develop and provide improved service to our global
customers by having a local presence in Asia. As we continue to
consolidate our manufacturing operations, we will incur additional costs to
transfer product lines to our China facility, including costs of qualification
testing with our customers, which could have a material adverse impact on our
operating results and financial condition.
Our
China-based activities are subject to greater political, legal and economic
risks than those faced by our other operations. In particular, the
political, legal and economic climate in China (both at national and regional
levels) is extremely fluid and unpredictable. Our ability to operate in China
may be adversely affected by changes in Chinese laws and regulations, such
as
those relating to taxation, import and export tariffs, environmental
regulations, land use rights, intellectual property and other matters, which
laws and regulations remain highly underdeveloped and subject to change, with
little or no prior notice, for political or other reasons. Moreover, the
enforceability of applicable existing Chinese laws and regulations is
uncertain. In addition, we may not obtain the requisite legal permits
to continue to operate in China and costs or operational limitations may be
imposed in connection with obtaining and complying with such permits. Our
business could be materially harmed by any changes in the political, legal
or
economic climate in China or the inability to enforce applicable Chinese laws
and regulations.
As
a
result of a government order to ration power for industrial use, operations
in
our China facility may be subject to possible interruptions or shutdowns,
adversely affecting our ability to complete manufacturing commitments on a
timely basis. If we are required to make significant investments in generating
capacity to sustain uninterrupted operations at our facility, we may not realize
the reductions in costs anticipated from our expansion in China. In addition,
future outbreaks of avian influenza, or other communicable diseases, could
result in quarantines or closures of our facility, thereby disrupting our
operations and expansion in China.
We
intend
to export the majority of the products manufactured at our facilities in China.
Accordingly, upon application to and approval by the relevant governmental
authorities, we will not be subject to certain Chinese taxes and are exempt
from
customs duty assessment on imported components or materials when the finished
products are exported from China. We are, however, required to pay income taxes
in China, subject to certain tax relief. As the Chinese trade regulations are
in
a state of flux, we may become subject to other forms of taxation and duty
assessments in China or may be required to pay for export license fees in the
future. In the event that we become subject to any increased taxes or new forms
of taxation imposed by authorities in China, our results of operations could
be
materially and adversely affected.
Our
business and operations would be adversely impacted in the event of a failure
of
our information technology infrastructure.
We
rely
upon the capacity, reliability and security of our information technology
hardware and software infrastructure and our ability to expand and update this
infrastructure in response to our changing needs. We are constantly updating
our
information technology infrastructure. Any failure to manage, expand and update
our information technology infrastructure or any failure in the operation of
this infrastructure could harm our business.
Despite
our implementation of security measures, our systems are vulnerable to damages
from computer viruses, natural disasters, unauthorized access and other similar
disruptions. Any system failure, accident or security breach could result in
disruptions to our operations. To the extent that any disruptions or security
breach results in a loss or damage to our data, or inappropriate disclosure
of
confidential information, it could harm our business. In addition, we may be
required to incur significant costs to protect against damage caused by these
disruptions or security breaches in the future.
If
we fail to remediate weaknesses in our current system of internal controls
to an
effective level, we may not be able to accurately report our financial results
or prevent fraud. As a result, our business could be harmed and current and
potential investors could lose confidence in our financial reporting, which
could have a negative effect on the trading price of our debt and equity
securities.
The
Company is subject to the ongoing internal control provisions of Section 404
of
the Sarbanes-Oxley Act of 2002. These provisions provide for the identification
of material weaknesses in internal control over financial reporting, which
is a
process to provide reasonable assurance regarding the reliability of financial
reporting for external purposes in accordance with U.S. GAAP. If we
cannot provide reliable financial reports or prevent fraud, our brand, operating
results and the market value of our debt and equity securities could be harmed.
We have in the past discovered, and may in the future discover, areas of our
internal controls that need improvement. Specifically, in Item 9A – Controls and
Procedures within this 2006 Annual Report on Form 10-K, management identified
certain material weaknesses in our internal controls processes.
We
have
devoted significant resources to remediate and improve our internal controls.
We
have also been monitoring the effectiveness of these remediated measures. We
cannot be certain that these measures will ensure adequate controls over our
financial processes and reporting in the future. We intend to continue
implementing and monitoring changes to our processes to improve internal
controls over financial reporting. Any failure to implement required new or
improved controls, or difficulties encountered in their implementation,
could harm our operating results or cause us to fail to meet our reporting
obligations.
Inadequate
internal controls could also cause investors to lose confidence in our reported
financial information, which could have a negative effect on the trading price
of our debt and equity securities. Further, the impact of these events could
also make it more difficult for us to attract and retain qualified persons
to
serve on our Board of Directors or as executive officers, which could harm
our
business. The additions of our manufacturing facility in China and acquisitions
increase the burden on our systems and infrastructure, and impose additional
risk to the ongoing effectiveness of our internal controls, disclosure controls,
and procedures. Consequently, we expect to expend significant
resources and effort in this regard, but are not certain that our efforts will
be successful.
Our
cost reduction programs may be insufficient to achieve long-term
profitability.
We
are
undertaking cost reduction measures intended to reduce our expense structure
at
both the cost of goods sold and the operating expense levels. We believe these
measures are a necessary response to, among other things, declining average
sales prices across our product lines. These measures may be unsuccessful in
creating profit margins sufficient to sustain our current operating structure
and business.
Shifts
in industry-wide demands and inventories could result in significant inventory
write-downs.
The
life
cycles of some of our products depend heavily upon the life cycles of the end
products into which our products are designed. Products with short life cycles
require us to manage production and inventory levels closely. We evaluate our
ending inventories on a quarterly basis for excess quantities, impairment of
value and obsolescence. This evaluation includes analysis of sales levels by
product and projections of future demand based upon input received from our
customers, sales team and management estimates. If inventories on hand are
in
excess of demand, or if they are greater than 12-months old, appropriate
reserves are provided. In addition, we write off inventories that are considered
obsolete based upon changes in customer demand, manufacturing process changes
that result in existing inventory obsolescence or new product introductions,
which eliminate demand for existing products. Remaining inventory balances
are
adjusted to approximate the lower of our manufacturing cost or market
value.
If
future
demand or market conditions are less favorable than our estimates, inventory
write-downs may be required. We cannot assure investors that obsolete or excess
inventories, which may result from unanticipated changes in the estimated total
demand for our products and/or the estimated life cycles of the end products
into which our products are designed, will not affect us beyond the inventory
charges that we have already taken.
Our
management's stock ownership gives them the power to control business affairs
and prevent a takeover that could be beneficial to unaffiliated
shareholders.
Certain
members of our management and the Board of Directors, specifically Thomas J.
Russell, Chairman of our Board, Reuben F. Richards, Jr., President, Chief
Executive Officer and a director, and Robert Louis-Dreyfus, a former director,
are former members of Jesup & Lamont Merchant Partners, L.L.C. They
collectively beneficially own approximately 18% of our common stock.
Accordingly, such persons will continue to hold sufficient voting power to
control our business and affairs for the foreseeable future. This concentration
of ownership may also have the effect of delaying, deferring or preventing
a
change in control of our company, which could have a material adverse effect
on
our stock price.
Certain
provisions of New Jersey law and our charter may make a takeover of EMCORE
difficult even if such takeover could be beneficial to some of our
shareholders.
New
Jersey law and our certificate of incorporation, as amended, contain certain
provisions that could delay or prevent a takeover attempt that our shareholders
may consider in their best interests. Our Board of Directors is divided into
three classes. Directors are elected to serve staggered three-year terms and
are
not subject to removal except for cause by the vote of the holders of at least
80% of our capital stock. In addition, approval by the holders of 80% of our
voting stock is required for certain business combinations unless these
transactions meet certain fair price criteria and procedural requirements or
are
approved by two-thirds of our continuing directors. We may in the future adopt
other measures that may have the effect of delaying or discouraging an
unsolicited takeover, even if the takeover were at a premium price or favored
by
a majority of unaffiliated shareholders. Certain of these measures may be
adopted without any further vote or action by our shareholders and this could
depress the price of our common stock.
|
|
Unresolved
Staff Comments
|
Not
Applicable.
The
following chart contains certain information regarding each of our principal
facilities.
|
Location
|
|
Function
|
|
Approximate
Square
Footage
|
|
Term
(in
fiscal year)
|
|
Albuquerque,
New Mexico
|
|
Corporate
Headquarters
Manufacturing
facility for photovoltaic products
Manufacturing
facility for digital fiber optic products
R&D
facility
|
|
165,000
|
|
Facilities
are owned by EMCORE; certain land is leased. Land lease expires
in 2050
|
| |
|
|
|
|
|
|
|
Alhambra,
California
|
|
Manufacturing
facility for CATV, FTTP and Satcom products
R&D
facility
|
|
91,000
|
|
Lease
expires in 2011 (1)
|
| |
|
|
|
|
|
|
|
City
of Industry, California
|
|
Facility
was vacated in December 2006
|
|
72,000
|
|
Lease
terminated by agreement in 2006
|
| |
|
|
|
|
|
|
|
Langfang,
China
|
|
Manufacturing
facility for fiber optics products
|
|
22,000
|
|
Lease
expires in 2012
|
| |
|
|
|
|
|
|
|
Somerset,
New Jersey
|
|
Former
Corporate Headquarters
Facility
vacated in September 2007
|
|
19,000
|
|
Lease
expires in 2007 (2)
|
| |
|
|
|
|
|
|
|
Sunnyvale,
California
|
|
Manufacturing
facility for ECL lasers
R&D
facility
Facility
expected to be vacated in 2008
|
|
15,000
|
|
Lease
expires in 2008 (1),
(3)
|
| |
|
|
|
|
|
|
|
Naperville,
Illinois
|
|
Manufacturing
facility for LX4 modules
R&D
facility
Facility
was vacated in October 2007
|
|
11,000
|
|
Lease
expires in 2013 (1)
|
| |
|
|
|
|
|
|
|
Ivyland,
Pennsylvania
|
|
Manufacturing
facility for CATV and Satcom products
R&D
facility
|
|
9,000
|
|
Lease
expires in 2011(1)
|
| |
|
|
|
|
|
|
|
San
Diego, California
|
|
Manufacturing
facility for video transport products
R&D
facility (April 2007 - Acquisition of Opticomm
Corporation)
|
|
8,100
|
|
Lease
expires in 2008
|
| |
|
|
|
|
|
|
|
Blacksburg,
Virginia
|
|
Manufacturing
facility for video transport products
R&D
facility.
Facility
was vacated in June 2007
|
|
6,000
|
|
Lease
expires in 2009 (1)
|
| |
|
|
|
|
|
|
|
Santa
Clara, California
|
|
Manufacturing
facility for digital fiber optics products
R&D
facility
Facility
was vacated in September 2007
|
|
4,000
|
|
Lease
expires in 2007 (4)
|
Notes:
|
|
(1)
|
This
lease has the option to be renewed by EMCORE, subject to inflation
adjustments.
|
|
|
(2)
|
Lease
is on a month-to-month basis. EMCORE subleases approximately
half of this facility to IQE plc.
|
|
|
(3)
|
EMCORE
subleases approximately one-third of this facility to third
parties.
|
|
|
(4)
|
Lease
is on a month-to-month basis.
|
The
Company is subject to various legal proceedings and claims that are discussed
below. The Company is also subject to certain other legal proceedings and claims
that have arisen in the ordinary course of business and which have not been
fully adjudicated. The Company does not believe it has a potential
liability related to current legal proceedings and claims that could
individually or in the aggregate have a material adverse effect on its financial
condition, liquidity or results of operations. However, the results of legal
proceedings cannot be predicted with certainty. Should the Company fail to
prevail in any legal matters or should several legal matters be resolved against
the Company in the same reporting period, the operating results of a particular
reporting period could be materially adversely affected. The Company settled
certain matters during 2006 that did not individually or in the aggregate have
a
material impact on the Company’s results of operations.
NASDAQ
Delisting Proceeding
On
December 18, 2006, EMCORE received a NASDAQ Staff Determination letter stating
that the Company was not in compliance with the filing requirements for
continued listing set forth in NASDAQ Marketplace Rule 4310(c)(14) and that
its
common stock was subject to delisting from The NASDAQ Stock Market. The notice,
which the Company expected, was issued as a result of the Company’s failure to
file its annual report on Form 10-K for the year ended September 30, 2006
with the SEC by the required deadline. The Company had previously filed a Form
12b-25 with the SEC indicating that the Company would be unable to file its
Form
10-K by the original filing deadline of December 14, 2006 due to the Company’s
ongoing review of its prior stock option grants.
On
February 13, 2007, EMCORE received a NASDAQ Staff Determination letter stating
that the Company was not in compliance with the filing requirements for
continued listing set forth in NASDAQ Marketplace Rule 4310(c)(14) and that
its
common stock was subject to delisting from The NASDAQ Stock Market. The notice,
which the Company expected, was issued as a result of the Company’s failure to
file its report on Form 10-Q for the fiscal quarter ended December 31, 2006
with
the SEC by the required deadline. The Company had previously filed a Form 12b-25
with the SEC indicating that the Company would be unable to file its Form 10-Q
by the original filing deadline of February 9, 2007 due to the Company’s ongoing
review of its prior stock option grants.
On
May
14, 2007, the Company received a NASDAQ Staff Determination letter stating
that
the Company was not in compliance with the filing requirements for continued
listing set forth in NASDAQ Marketplace Rule 4310(c)(14) and that its common
stock was subject to delisting from the NASDAQ Stock Market. The notice, which
the Company expected, was issued as a result of the Company’s failure to file
its report on Form 10-Q for the fiscal quarter ended March 31, 2007 with the
SEC
by the required deadline. The Company had previously filed a Form 12b-25 with
the SEC indicating that the Company would be unable to file its Form 10-Q by
the
original filing deadline of May 10, 2007 due to the Company’s ongoing review of
its prior stock option grants.
On
May
25, 2007, EMCORE filed an appeal of the May 10, 2007 Panel decision to grant
the
Company’s request for an extension through June 18, 2007. EMCORE
appealed the May 25, 2007 decision on the sole ground that the Panel could
not
grant the Company beyond June 18, 2007 to file the missing Form 10-K, Form
10-Qs
and restatements. On June 8, 2007, the Company requested that NASDAQ
stay the Panel’s May 10, 2007 decision pending the Company’s appeal of that
action.
On
June
15, 2007, the Company received a letter from the NASDAQ Stock Market stating
that the NASDAQ Listing and Hearing Review Council (the “Listing Council”) has
stayed the previously reported May 10, 2007 decision of the Panel and any future
Panel determinations to suspend the Company’s securities from trading on NASDAQ,
pending further review by the Listing Council. Consequently, the Company’s
securities would continue to be listed and tradable on the NASDAQ Global Market
System until further action by the Listing Council to lift the stay, which
would
not occur prior to August 10, 2007. In addition, the Company was
invited to submit any additional information to the Listing Council for
consideration in its review by no later August 10, 2007.
On
August
10, 2007, the Company submitted a letter, in response to the Listing Council’s
invitation, requesting that the Listing Council exercise its discretionary
authority in favor of granting the Company an additional extension to regain
compliance with NASDAQ’s filing requirement. The Company is awaiting
the Listing Council’s response to this letter.
On
August
13, 2007, the Company received a NASDAQ Staff Determination letter stating
that
the Company was not in compliance with the filing requirements for continued
listing set forth in NASDAQ Marketplace Rule 4310(c)(14) and that its common
stock was subject to delisting from the NASDAQ Stock Market. The
notice, which the Company expected, was issued as a result of the Company’s
failure to file its Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 2007 with the SEC by the required deadline. The Company had
previously filed a Notification of Late Filing on Form 12b-25 with the SEC
indicating that the Company would be unable to file this Quarterly Report by
the
original filing deadline of August 9, 2007 due to the Company’s ongoing review
of its prior stock option grants.
On
October 2, 2007, the Company received a NASDAQ Staff Determination letter
stating that the Company was not in compliance with holding its annual meeting
of shareholders within twelve months of the Company’s fiscal year end, as set
forth in NASDAQ Marketplace Rules 4350(e) and 4350(g) and that its common stock
was subject to delisting from the NASDAQ Stock Market. The notice,
which the Company expected, was issued as a result of the Company’s failure to
hold its annual shareholder meeting by September 30, 2007.
On
October 5, 2007, the Company has received a decision from the Listing Council
stating that, pursuant to its discretionary authority, it has granted the
Company an exception and allowed the Company until December 4, 2007 to
demonstrate compliance with all of the Global Market continued listing
requirements (the “Decision”). The Decision requires that the Company
file its Form 10-K for the fiscal year ended September 30, 2006 and its Form
10-Q for the quarters ended December 31, 2006, March 31, 2007 and June 30,
2007
with the SEC by the close of business on December 4, 2007. The
Decision also provides that if the Company has not filed these delinquent
reports with the SEC by the close of business on December 4, 2007, the Company’s
securities will be suspended at the opening of business on December 6,
2007.
Although
we believe the filing of this Form 10-K, and our concurrent filings of the
Form
10-Qs for the quarters ended December 31, 2006, March 31, 2007, and June 30,
2007 satisfy the Panel’s requirements, we cannot assure you that the Panel will
be satisfied with these filings. See the Explanatory Note in our
Annual Report on Form 10-K for the fiscal year ended September 30, 2006 for
a
discussion of stock option restatements that caused the delay in our SEC
filings.
SEC
Investigation
The
Company informed the staff of the SEC of the Special Committee’s investigation
on November 6, 2006. After the Company’s initial contact with the
SEC, the SEC opened a non-public investigation concerning the Company’s historic
option granting practices since the Company’s initial public
offering. The Company has cooperated fully with the SEC’s
investigation. Although we cannot predict the outcome of this matter,
we do not expect that such matter will have a material adverse effect on our
consolidated financial position or results of operations.
Shareholder
Derivative Litigation Relating to Historical Stock Option
Practices
On
February 1, 2007, Plaintiff Lewis Edelstein filed a purported stockholder
derivative action (the “Federal Court Action”) on behalf of the Company against
certain of its present and former directors and officers (the “Individual
Defendants”), as well as the Company as nominal defendant, in the United States
District Court for the District of New Jersey, Edelstein v. Brodie, et.
al., Case No. 3:07-cv-00596-FLW-JJH (D.N.J.). On May 22,
2007, Plaintiffs Kathryn Gabaldon and Michael Sackrison each filed a purported
stockholder derivative action against the Individual Defendants, and the Company
as nominal defendant, in the Superior Court of New Jersey, Somerset County,
Gabaldon v. Brodie, et. al., Case No. 3:07-cv-03185-FLW-JJH (D.N.J.) and
Sackrison v. Brodie, et. al., Case No. 3:07-cv-00596-FLW-JJH (D.N.J.)
(collectively, the “State Court Actions”).
Both
the
Federal Court Action and the State Court Actions alleged, using essentially
identical contentions that the Individual Defendants engaged in improprieties
and violations of law in connection with the Company’s historical issuances of
stock options. Each of the actions seeks the same relief on behalf of
the Company, including, among other things, damages, equitable relief, corporate
governance reforms, an accounting, rescission, restitution and costs and
disbursements of the lawsuit. On July 10, 2007, the State Court
Actions were removed to the United States District Court for the District of
New
Jersey.
On
September 26, 2007, the plaintiff in the Federal Court Action signed an
agreement in principle with the Individual Defendants and the Company to settle
that litigation in accordance with the Memorandum of Understanding (the “MOU”)
filed as Exhibit 10.10 to this Annual Report on Form 10-K. That same
day, the plaintiffs in the State Court Actions advised the Federal Court that
the settlement embodied in the MOU would also constitute the settlement of
the
State Court Actions.
The
MOU
provides that the Company will adhere to certain policies and procedures
relating to the issuance of stock options, stock trading by directors, officers
and employees, the composition of its Board of Directors, and the functioning
of
the Board’s Audit and Compensation Committees. The MOU also provides
for the payment of $700,000 relating to plaintiff’s attorneys’ fees, costs and
expenses, which the Company’s insurance carrier has committed to pay on behalf
of the Company. To be fully implemented, the MOU will be embodied in
a more detailed stipulation of settlement and will be expressly conditioned
on
Court approval following a period for comment by potentially affected
parties.
We
have
recorded $700,000 as a liability for the stipulated settlement as of September
30, 2006 since events that led to the litigation existed as of that
date. Although we anticipate that our insurance carrier will cover
the stipulated settlement, we have not recorded any receivable, or gain
contingency, since the settlement is still contingent upon certain future
events.
Indemnification
Obligations
Subject
to certain limitations, we are obligated to indemnify our current and former
directors, officers and employees in connection with the investigation of our
historical stock option practices, related government investigation and
shareholder litigation. These obligations arise under the terms of our
certificate of incorporation, our bylaws, applicable contracts, and New Jersey
law. The obligation to indemnify generally means that we are required to pay
or
reimburse the individuals’ reasonable legal expenses and possibly damages and
other liabilities incurred in connection with these matters. We are currently
paying or reimbursing legal expenses being incurred in connection with these
matters by a number of our current and former directors, officers and employees.
The maximum potential amount of future payments the Company could be required
to
make under these indemnification agreements is unlimited; however, the Company
has a director and officer liability insurance policies that limits its exposure
and enables it to recover a portion of any future amounts paid.
Intellectual
Property Lawsuits
We
protect our proprietary technology by applying for patents where appropriate
and
in other cases by preserving the technology, related know-how and information
as
trade secrets. The success and competitive position of our product lines is
significantly impacted by our ability to obtain intellectual property protection
for our R&D efforts.
We
have,
from time to time, exchanged correspondence with third parties regarding the
assertion of patent or other intellectual property rights in connection with
certain of our products and processes. Additionally, on September 11, 2006,
we
filed a lawsuit against Optium Corporation (Optium) in the United States
District Court for the Western District of Pennsylvania for patent infringement.
In the suit, EMCORE and JDS Uniphase Corporation (JDSU) allege that Optium
is
infringing on U.S. patents 6,282,003 and 6,490,071 with its Prisma II 1550nm
transmitters. On March 14, 2007, following denial of a motion to add additional
claims to its existing lawsuit, EMCORE and JDSU filed a second patent suit
in
the same court against Optium alleging infringement of JDSU's patent
6,519,374. On March 15, 2007, Optium filed a declaratory judgment
action against the Company and JDSU. Optium seeks in this litigation a
declaration that certain products of Optium do not infringe United States Patent
No. 6,519,374 ("the '374 patent") and that the patent is invalid. The '374
patent is assigned to JDSU and licensed to the Company. Other than the filing
of
a Complaint, Optium has taken no action in this case, and the Company has not
been served.
|
|
Submission
of Matters to a Vote of Security
Holders
|
No
matters were submitted to a vote of security holders during the fourth quarter
ended September 30, 2006.
PART
II
|
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity
Securities
|
The
Company’s common stock is traded on the NASDAQ Global Market and is quoted under
the symbol "EMKR". The reported closing sale price of our common stock on
October 19, 2007 was $9.71 per share. As of October 19, 2007, we had
approximately 240 shareholders of record. Many of our shares of
common stock are held by brokers and other institutions on behalf of
stockholders, and we are unable to estimate the number of these
stockholders.
Price
Range of Common Stock
The
price
range per share of common stock presented below represents the highest and
lowest sales prices for the Company’s common stock on the NASDAQ Global Market
during each quarter of the two most recent fiscal years.
| |
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
Fiscal
2006 price range per share of common stock
|
|
$ |
4.97
–
$7.83
|
|
|
$ |
6.93
– $10.67
|
|
|
$ |
7.65
– $12.65
|
|
|
$ |
5.56
– $10.11
|
|
|
Fiscal
2005 price range per share of common stock
|
|
$ |
1.46
– $3.97
|
|
|
$ |
2.25
– $ 3.77
|
|
|
$ |
2.70
– $ 4.75
|
|
|
$ |
4.00
– $ 6.12
|
|
Dividend
Policy
We
have
never declared or paid dividends on our common stock since the Company's
formation. We currently do not intend to pay dividends on our common stock
in
the foreseeable future, so that we may reinvest any earnings in our business.
The payment of dividends, if any, in the future is at the discretion of the
Board of Directors.
Equity
Compensation Plan Information
The
description of equity compensation plans required by Regulation S-K, Item
201(d) is incorporated herein by reference to Part III, Item 12 –
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
The
following selected consolidated financial data of EMCORE's five most recent
fiscal years ended September 30, 2006 is qualified by reference to, and should
be read in conjunction with, Management’s Discussion and Analysis of Financial
Condition and Results of Operations under Item 7 and Financial Statements and
Supplementary Data under Item 8. The Statement of Operations data set forth
below and the Balance Sheet data as of September 30, 2006 and 2005 are derived
from EMCORE's restated financial statements included elsewhere in this document.
The Balance Sheet data as of September 30, 2004, 2003, and 2002 are derived
from
restated financial statements not included herein.
The
following information should be read in conjunction with our consolidated
financial statements and notes thereon. The information presented in
the following tables has been adjusted to reflect effects of the restatement
of
the Company’s financial results, which is more fully described in the
“Explanatory Note” immediately preceding Part I, Item 1 and Note 20,
“Restatement of Consolidated Financial Statements” in Notes to Consolidated
Financial Statements of this Form 10-K.
The
information set forth below is not necessarily indicative of results for future
operations. Significant transactions that affect the comparability of
EMCORE’s operating results and financial condition include:
Financial
Highlights:
Fiscal
2006:
|
|
·
|
In
November 2005, EMCORE exchanged $14.4 million aggregate principal
amount
of EMCORE’s 5% convertible subordinated notes due in May 2006 for $16.6
million aggregate principal amount of newly issued convertible senior
subordinated notes due May 15, 2011. As a result of this transaction,
EMCORE recognized approximately $1.1 million in the first quarter
of
fiscal 2006 related to the early extinguishment of
debt.
|
|
|
·
|
EMCORE
received manufacturing equipment valued at $2.0 million less tax
of $0.1
million as a final earn-out payment from Veeco in connection with
the sale
of the TurboDisc business.
|
|
|
·
|
In
August 2006, EMCORE sold its Electronic Materials &
Device (EMD) division to IQE plc (IQE) for $16.0
million. The net gain associated with the sale of the EMD business
totaled
approximately $7.6 million, net of tax of $0.5 million. The
results of operations of the EMD division have been reclassified
to
discontinued operations for all periods
presented.
|
|
|
·
|
In
August 2006, EMCORE sold its 49% membership interest in GELcore,
LLC for
$100.0 million to General Electric Corporation, which prior to the
transaction owned the remaining 51% membership interest in
GELcore. EMCORE recorded a net gain of $88.0 million, before
tax, on the sale of GELcore, after netting EMCORE’s investment in this
joint venture of $10.8 million and transaction expenses of $1.2
million.
|
|
|
·
|
EMCORE
recorded approximately $2.2 million of impairment charges on goodwill
and
intellectual property associated with the June 2004 acquisition of
Corona
Optical Systems.
|
|
|
·
|
Other
expense included a charge of $0.5 million associated with the write-down
of the Archcom investment.
|
|
|
·
|
EMCORE
recognized a provision for income taxes of $1.9 million from continuing
operations for the year ended September 30,
2006.
|
Fiscal
2005:
|
|
·
|
SG&A
expense included approximately $0.9 million in severance-related
charges
and $2.3 million of charges associated with the consolidation of
EMCORE’s
City of Industry, California location to Albuquerque, New
Mexico.
|
|
|
·
|
EMCORE
received a $12.5 million net earn-out payment from Veeco in connection
with the 2003 sale of the TurboDisc
business.
|
Fiscal
2004:
|
|
·
|
In
November 2003, EMCORE sold its TurboDisc capital equipment (TurboDisc)
division to a subsidiary of Veeco Instruments, Inc. (Veeco). The
results
of operations of TurboDisc have been reclassified to discontinued
operations for all periods presented. The net gain associated with
the
sale of the TurboDisc business totaled approximately $19.6
million.
|
|
|
·
|
In
February 2004, EMCORE exchanged approximately $146.0 million, or
90.2%, of
the 2006 Notes for approximately $80.3 million aggregate principal
amount
of new 5% Convertible Senior Subordinated Notes due May 15, 2011
and
approximately 7.7 million shares of EMCORE common stock. The total
net
gain from debt extinguishment was $12.3
million.
|
|
|
·
|
SG&A
expense included approximately $1.2 million in severance-related
charges.
|
|
|
·
|
Other
expense included a charge of $0.5 million associated with the write-down
of an investment.
|
Fiscal
2003:
|
|
·
|
In
December 2002, EMCORE purchased $13.2 million principal amount of
the 2006
Notes at prevailing market prices for approximately $6.3 million.
Total
gain from debt extinguishment was $6.6 million after netting unamortized
debt issuance costs of approximately $0.3
million.
|
|
|
·
|
In
January 2003, EMCORE purchased Ortel for $26.2 million in
cash.
|
Fiscal
2002:
|
|
·
|
In
March 2002, EMCORE acquired certain assets of Tecstar for a total
cash
purchase price of approximately $25.1
million.
|
|
|
·
|
EMCORE
recorded pre-tax charges to income totaling $40.7 million, which
included:
a) a severance SG&A charge of $0.8 million related to employee
termination costs, b) a SG&A charge of $30.8 million
related to impairment of certain fixed assets, c) an inventory write-down
expense of $7.7 million charged to cost of revenue, and d) an additional
reserve for doubtful accounts of $1.4 million which was charged to
SG&A expense.
|
|
|
·
|
Other
expense included a charge of $14.4 million associated with the write-off
of two investments.
|
Selected
Financial Data
Statements
of Operations Data
For
the fiscal years ended September 30
(in
thousands, except per share data)
| |
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
143,533
|
|
|
$
|
115,367
|
|
|
$
|
81,885
|
|
|
$
|
50,852
|
|
|
$
|
32,695
|
|
|
Gross
profit (loss)
|
|
|
25,952
|
|
|
|
19,302
|
|
|
|
4,473
|
|
|
|
(3,231
|
)
|
|
|
(12,884
|
)
|
|
Operating
loss
|
|
|
(34,150
|
)
|
|
|
(20,371
|
)
|
|
|
(35,604
|
)
|
|
|
(38,256
|
)
|
|
|
(68,711
|
)
|
|
Income
(loss) from continuing operations
|
|
|
46,891
|
|
|
|
(24,685
|
)
|
|
|
(28,376
|
)
|
|
|
(40,149
|
)
|
|
|
(91,876
|
)
|
|
Income
(loss) from discontinued operations
|
|
|
9,884
|
|
|
|
11,200
|
|
|
|
14,422
|
|
|
|
(3,389
|
)
|
|
|
(43,523
|
)
|
|
Net
income (loss)
|
|
$
|
54,923
|
|
|
$
|
(13,485
|
)
|
|
$
|
(13,954
|
)
|
|
$
|
(43,538
|
)
|
|
$
|
(135,399
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
basic share
|
|
$
|
0.91
|
|
|
$
|
(0.52
|
)
|
|
$
|
(0.66
|
)
|
|
$
|
(1.09
|
)
|
|
$
|
(2.51
|
)
|
|
Per
diluted share
|
|
$
|
0.87
|
|
|
$
|
(0.52
|
)
|
|
$
|
(0.66
|
)
|
|
$
|
(1.09
|
)
|
|
$
|
(2.51
|
)
|
Balance
Sheet Data
As
of September 30
(in
thousands)
| |
|
|
2006
|
|
|
|
2005
|
|
|
|
2004
|
|
|
|
2003
|
|
|
|
2002
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
cash equivalents and marketable securities
|
|
$
|
123,967
|
|
|
$
|
40,175
|
|
|
$
|
51,572
|
|
|
$
|
28,439
|
|
|
$
|
84,180
|
|
|
Working
capital
|
|
|
129,683
|
|
|
|
56,996
|
|
|
|
58,486
|
|
|
|
77,382
|
|
|
|
111,650
|
|
|
Total
assets
|
|
|
287,547
|
|
|
|
206,287
|
|
|
|
213,243
|
|
|
|
232,439
|
|
|
|
285,943
|
|
|
Long-term
liabilities
|
|
|
84,516
|
|
|
|
94,701
|
|
|
|
96,051
|
|
|
|
161,750
|
|
|
|
175,000
|
|
|
Shareholders’
equity
|
|
|
149,399
|
|
|
|
75,563
|
|
|
|
85,809
|
|
|
|
44,772
|
|
|
|
81,950
|
|
EMCORE
CORPORATION
Consolidated
Statement of Operations - Unaudited
(in
thousands, except per share data)
| |
|
As
Previously Reported
|
|
|
EMD
Discontinued Operations Adjustment (1)
|
|
|
Stock
Compensation Expense Adjustment (2)
|
|
|
|
|
|
|
|
$ |
60,284
|
|
|
$ |
(9,432 |
) |
|
$ |
-
|
|
|
$ |
50,852
|
|
|
|
|
|
|
|
|
|
(8,756 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
(1,675 |
) |
|
|
(676 |
) |
|
|
(880 |
) |
|
|
(3,231 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
|
|
|
|
(2,460 |
) |
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
|
|
|
|
(2,172 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,632 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
(40,314 |
) |
|
|
|
|
|
|
(1,898 |
) |
|
|
(38,256 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,009 |
) |
|
|
|
|
|
|
|
|
|
|
(1,009 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
gain from debt extinguishment
|
|
|
(6,614 |
) |
|
|
|
|
|
|
|
|
|
|
(6,614 |
) |
Equity
in net loss of GELcore investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations
|
|
|
(42,207 |
) |
|
|
|
|
|
|
(1,898 |
) |
|
|
(40,149 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations, net of tax
|
|
|
|
|
|
|
(3,956 |
) |
|
|
(3,115 |
) |
|
|
(3,389 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(38,525 |
) |
|
$ |
-
|
|
|
$ |
(5,013 |
) |
|
$ |
(43,538 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations
|
|
$ |
(1.14 |
) |
|
$ |
0.10
|
|
|
$ |
(0.05 |
) |
|
$ |
(1.09 |
) |
Income
(loss) from discontinued operations
|
|
|
|
|
|
|
(0.10 |
) |
|
|
(0.09 |
) |
|
|
(0.09 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1.04 |
) |
|
$ |
-
|
|
|
$ |
(0.14 |
) |
|
$ |
(1.18 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
number of shares outstanding used in basic and diluted per share
calculations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
____________
|
|
(1)
|
In
August 2006, EMCORE sold its EMD division to IQE.EMCORE’s financial
statements have been reclassified to reflect the EMD business as
a
discontinued operation.
|
|
|
(2)
|
This
restatement principally reflects additional stock-based compensation
expense under APB 25, the Company’s historical accounting method, relating
to the Company’s historical stock option grants. See
Explanatory Note immediately preceding Part I of this Annual Report
regarding our restated financial statements. See Item 8 –
Financial Statements and Supplementary Data, specifically Note 20
of the
Notes to Consolidated Financial Statements, for the financial impact
of
the stock-based compensation expense, on a year-by-year basis, associated
with our historical stock option grant
review.
|
EMCORE
CORPORATION
Consolidated
Statements of Operations - Unaudited
(in
thousands, except per share data)
| |
|
As
Previously Reported
|
|
|
EMD
Discontinued
Operations Adjustment (1)
|
|
|
Stock
Compensation
Expense
Adjustment
(2)
|
|
|
|
|
|
|
|
$ |
51,236
|
|
|
$ |
(18,541 |
) |
|
$ |
-
|
|
|
$ |
32,695
|
|
|
|
|
|
|
|
|
|
(17,660 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
(11,149 |
) |
|
|
(881 |
) |
|
|
(854 |
) |
|
|
(12,884 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
|
|
|
|
(2,765 |
) |
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
|
|
|
|
(2,562 |
) |
|
|
|
|
|
|
|
|
|
Impairment
|
|
|
|
|
|
|
(17,718 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,045 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
(89,024 |
) |
|
|
|
|
|
|
(1,851 |
) |
|
|
(68,711 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
